STATE GOVERNMENT RELATIONS
Interim Study Committee Topics Announced
The Indiana General Assembly's Legislative Council met Tuesday to assign topics for lawmakers to study during the 2023 legislative interim. The Legislative Council is comprised of eight members of the Indiana Senate and eight members of the Indiana House of Representatives. This year, Senate President Pro Tem Rodric Bray, R-Martinsville, serves as chair, and House Speaker Todd Huston, R-Fishers, serves as vice chair.
Bray said the State and Local Tax Review Task Force should be of particular interest to all Hoosiers. The task force will undertake a holistic review of the state's tax system and identify opportunities to improve. House and Senate leaders will assign members to each study committee in the coming weeks. Committees will meet during the summer and fall months in preparation for the 2024 session of the General Assembly.
Read the resolution outlining the assigned topics
FEDERAL GOVERNMENT RELATIONS
OCC Cautions Against Growing Credit Risk in Banking Report
In its semiannual risk perspective report released Wednesday, the Office of the Comptroller indicated that the overall strength of the federal banking system is sound, but banks should still remain diligent and confirm their risk management practices. The agency noted that the system as a whole faced increased volatility due to a liquidity crisis in the first quarter of 2023 following the failures of Silicon Valley Bank and Signature Bank. However, it said that liquidity levels have been strengthened in response to the closures.
The OCC said credit risk remains moderate, but signs of stress are increasing, such as in certain segments of commercial real estate. Credit markets and loan portfolios remain resilient, and problem loan levels remain manageable. Still, it added that the persistent drag from high inflation and rising interest rates is causing credit conditions to deteriorate. Operational risk remains elevated, with cybersecurity remaining a major concern. Compliance risk is also elevated as compliance systems are challenged to keep pace with changing services, products, and delivery channel offerings.
Acting Comptroller of the Currency Michael Hsu urged banks to "be on the balls of their feet" with risk management. That includes re-evaluating exposures, especially asset and liability concentrations, across a range of scenarios; taking actions to preserve capital and maintain strong liquidity consistent with each bank's risk profile; and maintaining discipline and strong risk management across all risk areas, "not just in response to headlines." Hsu also told reporters during a press briefing that banking sector turmoil caused the agency to push back the timeline of finalizing its Community Reinvestment Act proposal, which was expected in the coming months, Politico reported
FOMC Pauses Rate Hikes, Says More Increases Likely Coming
The Federal Open Market Committee announced Wednesday it would leave the target range for the federal funds rate at 5-5.25%, marking the first pause since it began raising rates last year. However, the FOMC said that future rate hikes will likely be needed to return inflation to the Federal Reserve's 2% target.
The FOMC voted to increase the rate by 25 basis points in May, the tenth consecutive rate hike. Federal Reserve Chairman Jerome Powell said that given how quickly the FOMC had raised rates, "we judged it prudent to hold the target range study to allow the committee to assess additional information and its implications for monetary policy." He added that the median projection among FOMC participants for the appropriate rate level was 5.6% by the end of the year, 4.6% by the end of 2024, and 3.4% by the end of 2025.
"The main issue that we're focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time," Powell said. "The pace of the increases and the ultimate level of increases are separate variables. Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace."
Powell said there was no discussion during the FOMC meeting on the possible pace of those future rate increases. Regarding what committee members will be looking for, the chairman said there are signs that inflation in goods and housing is coming down but little movement on non-housing services, which is labor intensive. "Many analysts would say that the key to getting inflation down there is to have a continuing loosening in labor market conditions, which we have seen…we need to see that continue," he said.
Agencies Issue Spring Regulatory Agenda Addressing Overdraft, NSF Fees
On Tuesday, the Biden administration issued its spring 2023 semiannual regulatory agenda, a semiannual listing of rulemakings that departments and agencies expect to initiate or continue during the next six months. The agenda is current as of May 31, 2023.
In the agenda, the Consumer Financial Protection Bureau continued to project that it will commence "pre-rule activity" in November to examine whether overdraft fees are finance charges, which would subject the fees to the requirements of Regulation Z. The bureau also continues to project that it will commence pre-rule activity in November to "consider new rules regarding NSF fees." The CFPB did not indicate what rules it may be contemplating.
The Labor Department projected August for issuance of a proposed rule to "update" the salary level used to determine whether an employee is subject to federal minimum wage and overtime requirements. This reflects a delay from DOL's earlier projection of April for the issuance of a proposed rule. The Financial Crimes Enforcement Network expects in September to issue a final rule on access to the beneficial ownership registry that the agency established last fall, and that will come online in January 2024. It also expects to issue a notice of proposed rulemaking on revisions to customer due diligence requirements in November.
Chopra Pressured on Use of 'Junk Fees' Label
Consumer Financial Protection Bureau Director Rohit Chopra was challenged about his use of the term 'junk fees' during a House Financial Services Committee hearing on Wednesday, with committee Republicans accusing the agency of making up the concept to give itself power beyond what was mandated by Congress. Chopra appeared before House lawmakers for the second of two days of congressional hearings on the CFPB. Several Republicans accused him of using the agency's power to threaten businesses for engaging in legitimate practices.
"When you issue press releases, you make up new words, like' junk fees,'" Rep. Blaine Luetkemeyer, R-Mo., said. "Junk fees is not a legal term. It is not an enforceable term. I've checked it with attorneys…This is an unenforceable term you made it up to give yourself more authority.
Hsu: Third-Party Risk Management Guidance Offers Flexibility for Smaller Banks
Regulators acknowledge that proper due diligence of third-party vendor relationships can be a struggle for smaller banks with their limited resources, which is why recent interagency guidance on the subject provides flexibility in how smaller institutions approach those reviews, Acting Comptroller of the Currency Michael Hsu said Monday.
Last week, the Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corp. issued long-awaited joint guidance for financial institutions when managing risks associated with third-party relationships. They also pledged to develop additional resources to assist community banks in managing third-party risks. During a Q&A at an online conference on minority depository institutions, Hsu said regulators received many comments while drafting the document about the struggle smaller institutions face in performing due diligence.
"We acknowledge that and we say, 'look, smaller banks, you can rely on group efforts, joint efforts, certifications – other ways to skin the cat,'" Hsu said. "You don't each have to do your own due diligence over and over and over again. If there's other mechanisms, we're open to that. So we built that in explicitly recognizing that space needs to be built out."
Still, support among policymakers for the guidance isn't unanimous. In a statement accompanying the document's release, Fed Governor Michelle Bowman said she was concerned that community banks would find it difficult to implement. "I am confident that community banks will do what is necessary to meet supervisory expectations, but I am disappointed that the agencies failed to make the upfront investment to reduce unnecessary confusion and burden on community banks," she said.
FDIC's Hill Cautions Against Regulatory Overreaction to Bank Closures
As policymakers draft new rules in response to the recent bank failures, it is important not to overreact and saddle the banking industry with overcorrections to address targeted problems, Federal Deposit Insurance Corp. Vice Chairman Travis Hill said Monday during a conference on minority depository institutions (MDIs). "What we don't want to do is make it more difficult for institutions like MDIs and CDFIs [community development financial institutions] to be able to navigate when there is stress," he said.
Hill was asked during a Q&A about his policy priorities in light of the failure of Silicon Valley Bank. He said that as banking regulators think about their upcoming rulemakings, they need to keep in mind the current environment that banks face. "The Fed, in particular, has talked about a pretty ambitious rulemaking agenda for the coming months and years, and I think this is at a time where there are still some fragilities in parts of the banking sector," Hill said. "We are still trying to rebuild confidence in the industry.
"I think there's a compelling argument to at least just get through this rate-hiking cycle and see where the dust settles," Hill added. "Once we're through that, take a look at the lay of the land, see what lessons were learned, and then, at that point, take a look at the potential proposals that we could consider and think about which ones are the most worthwhile given the conditions at the time."
Watch a recording of Hill's remarks
Chopra Defends CFPB Actions in Senate Hearing
During a Tuesday Senate Banking Committee hearing, Consumer Financial Protection Bureau Director Rohit Chopra fielded questions on the agency's proposed rule to further limit credit card late fees and allegations that he bypasses regulatory review by issuing policy changes through agency guidance and press announcements. Committee Republicans were particularly critical, with Ranking Member Tim Scott, R-S.C., saying the agency "routinely and brazenly acts outside of the scope of its authority."
"Director Chopra has created uncertainty in the marketplace by attempting to regulate through speeches and issuing blog posts under the guise of 'clarifying guidance,'" Scott said. "The result of rulemaking and enforcement by a blog post? Fewer consumers are actually protected, and fewer options of financial products will be made available."
Chopra and committee Democrats pushed back against critics, arguing that the CFPB isn't enacting new policies but simply implementing existing statutes. "The thing we hear from small firms is they really want to know how existing law applies," Chopra said. "We have so many changes in technology, and these small firms don't have the ability to hire many lawyers, so I have continued a practice of my predecessor, Director [Kathy] Kraninger, to issue these advisory opinions and other guidance documents. They do not create any new obligations. They simply restate what the existing laws are."
In terms of the credit card late fees, Chopra said that the rule still allows card issues to recover their costs, but the agency is seeking to make that process "more rigorous and make sure it reflects market realities." Some committee members were skeptical. Sen. Thom Tillis, R-N.C., said the CFPB data used in drafting the rule doesn't account for the costs incurred by banks to manage card accounts.
"If these accounts cost more than the revenue stream to sustain them, how do they make it up?" Tillis asked. "They make it up in one of two ways, right? They don't bank with a given customer, or they find a way to get the revenue to cover the loss from a losing proposition. So it seems like we are moving down a path where you are going to artificially cap what you may need to justify even having that relationship."
CFPB to Issue Open Banking Rule in Coming Months
In a new blog post on the Consumer Financial Protection Bureau website, Director Rohit Chopra said the agency will issue a formal proposal in the next few months on a new personal data rights rule "to accelerate the shift to open banking." Chopra said the rule – which would implement Section 1033 of the Dodd-Frank Ac – would give consumers more control of their personal financial data, but he did not provide specifics about what would be in the proposal. The agency will seek to finalize the rule in 2024, he said.
"Our proposal will recognize that the CFPB must resolve certain core issues because system participants are deadlocked or because existing approaches do not put consumers fully in the driver's seat," Chopra said. "But many of the details in open banking will be handled through standard-setting outside of the agency. Properly pursued, such standards can allow open banking to evolve as new technologies emerge, new products develop, and new data security challenges arise."
McHenry Introduces Bill to Delay Beneficial Ownership Reporting Implementation
House Financial Services Committee Chairman Patrick McHenry, R-N.C., introduced legislation on Monday that would effectively delay the date that beneficial ownership reporting requirements go into effect, which is currently Jan. 1, 2024. The legislation was one of two bills introduced by McHenry concerning the Financial Crimes Enforcement Network – the other would make FinCEN's director a post nominated by the president with the consent of the Senate.
FinCEN established a beneficial ownership registry last year pursuant to the Corporate Transparency Act (CTA). The American Bankers Association, state bankers associations and lawmakers from both parties have criticized the agency's implementation of the law. McHenry's bill – the Protecting Small Business Information Act – would push back the effective date of beneficial ownership implementation until FinCEN finalizes all rulemakings required by the CTA, including the proposed registry access rulemaking and revising the customer due diligence rule, which FinCEN has not yet proposed as a rulemaking.