FDIC Chair Jelena McWilliams Highlights Policies to Serve Underbanked Customers

FDIC Chair Jelena McWilliams highlighted agency priorities to ensure that banks offer “affordable, responsible financial products and services to consumers across the spectrum.”

In remarks at the Florida Bankers Association Leadership Dinner, Ms. McWilliams stated that the agency’s priorities include:

  • encouraging de novo bank formation; she said that de novo banks are a “key source of new capital, talent, ideas, and ways to serve customers”;
  • tailoring FDIC’s regulations to permit banks to serve customers more efficiently while also making sure banks stay “safe and sound”;
  • taking a “holistic” look at the FDIC’s supervision of banks;
  • ensuring that banks “leverag[e] technology” to reach unbanked and underbanked consumers;
  • “protecting the Deposit Insurance Fund and maintaining financial stability [while] allowing banks room to be nimble and make the right business decisions to better serve their customers and communities”; and
  • ensuring that the FDIC and the banking industry respond to changes in consumer behavior.

Lofchie Comment: FDIC Chair McWilliams’ comments focused to a significant degree on assisting banks in providing services to the poor and overextended, those who live “paycheck to paycheck” and who sometimes “need immediate access to cash to cover an unexpected cost before the next paycheck.” The business of lending money to those who urgently need small amounts for short periods was disparagingly referred to as “payday lending.” Under the CFPB’s prior administration the CFPB adopted rules that would have significantly discouraged such lending. See, e.g., CFPB Imposes Stricter Rules for Payday Lending. While it is all well and good to regulate practices that protect disadvantaged consumers, it is not so great if the protection leaves these consumers worse off by depriving them entirely of access to credit. Ms. McWilliams comments suggest that she will be more attuned to the costs as well as the benefits of regulation.

NYDFS Superintendent Reminds Firms of Final Implementation Date for Cybersecurity Regulation

New York State Department of Financial Services (“NYDFS”) Superintendent Maria Vullo reminded NYDFS-regulated entities that they must be in full compliance with the requirements of the NYDFS’s cybersecurity regulation by March 1, 2019.

The NYDFS cybersecurity regulation requires banks, insurance companies and other institutions regulated by the NYDFS (“covered entities”) to implement a cybersecurity program to protect consumer data (see previous coverage). The NYDFS cybersecurity regulation went into effect on March 1, 2017, subject to a two-year implementation timeline. The final step in the implementation timeline requires covered entities to adopt policies governing arrangements with third-party providers that have access to firms’ nonpublic information. The NYDFS also reminded firms to file a certificate of compliance for the prior calendar year by February 15, 2019.

Lofchie Comment: As previously described, the NYDFS rules are open-ended, complex and burdensome and will result in creating many new ways for the government to collect fines when something goes wrong.

Ranking Member of the House Financial Services Committee Offers Republican List of Hearing Priorities

Ranking Member of the House Financial Services Committee (“HFSC”) Patrick McHenry (R-NC) offered to cooperate with new Chair Maxine Waters on a list of priorities affecting the U.S. financial system.

According to Mr. McHenry, the list of hearing topics concern areas that are critical to ensuring the “strength and stability of the U.S. financial system and the global competitiveness of American job creators.” The list includes:

  • Britain’s withdrawal from the European Union and its effects on the U.S. economy and the international financial system;
  • the Export-Import Bank and “its impact on the global competitiveness of U.S. companies and U.S. job creation”;
  • cybersecurity within the financial space, to evaluate the “readiness” of the financial sector and the ability of the U.S. government to protect digital consumer accounts against fraud, misuse and improper access;
  • China’s “debt trap” and the implications of China’s lending decisions in relation to the IMF, the World Bank and global systemic risk;
  • foreign investment and venture capital in the global economy, to assess how the U.S. Treasury Department is implementing the Foreign Investment Risk Review Modernization Act of 2018;
  • scheduled reductions to the Federal Reserve’s balance sheet, specifically in relation to unwinding crisis-era asset purchases;
  • the National Flood Insurance Program (“NFIP”), to examine proposed reforms that could impact the “affordability, availability and long-term solvency of the NFIP”;
  • the modernization of the Bank Secrecy Act and Anti-Money Laundering regulatory regime to inspect the duplicative nature of the current rules;
  • the Terrorism Risk Insurance Act, to provide oversight of the program, better comprehend the private insurance market, and build consensus before the program expires;
  • the regulation of FinTech; and
  • the oversight of the Financial Accounting Standards Board and its Current Expected Credit Loss Accounting Standard.

Mr. McHenry noted that the list is not exclusive, but that it gives the HFSC an opportunity to better understand the “complex legislative landscape we will face this Congress.”

Lofchie Comment: The list contains a number of important big-picture concerns. It is not a list, however, likely to generate much political or press excitement. In this environment, it is an open question whether Chair Waters will take up any of the items on Representative McHenry’s list.

Senate Banking Committee Names New Subcommittee Members

The U.S. Senate Committee on Banking, Housing, and Urban Affairs Chair Mike Crapo (R-IA) and Ranking Member Sherrod Brown (D-OH) named new members to the banking subcommittees for the 116th Congress.

The banking subcommittees include (i) Housing, Transportation, and Community Development (David Perdue, GA, Chair, Robert Menendez, NJ, Ranking Democrat); (ii) Financial Institutions and Consumer Protection (Tim Scott, SC, Chair; Elizabeth Warren, MA, Ranking Democrat); (iii) Securities, Insurance, and Investment (Patrick J. Toomey, PA, Chair; Chris Van Hollen, MD, Ranking Democrat); (iv) National Security and International Trade and Finance (Ben Sasse, NE, Chair; Mark Warner, VA, Ranking Democrat); and (v) Economic Policy (Tom Cotton, AR, Chair; Catherine Cortez Masto, NV, Ranking Democrat).

Mr. Crapo and Mr. Brown will serve on all subcommittees as non-voting members.

Democratic Steering and Policy Committee Names New Members to Financial Services Committee

The House Democratic Steering and Policy Committee named new members to the House Financial Services Committee in the 116th Congress. The newly chosen members are:

  • Representative Alma Adams (D-NC);
  • Representative Cindy Axne (D-IA);
  • Representative Sean Casten (D-IL);
  • Representative Madeline Dean (D-PA);
  • Representative Tulsi Gabbard (D-HI);
  • Representative Jesus Garcia (D-IL);
  • Representative Sylvia Garcia (D-TX);
  • Representative Al Lawson (D-FL);
  • Representative Ben McAdams (D-UT);
  • Representative Alexandria Ocasio-Cortez (D-NY);
  • Representative Dean Phillips (D-MN);
  • Representative Katie Porter (D-CA);
  • Representative Ayanna Pressley (D-MA):
  • Representative Michael San Nicolas (D-GU);
  • Representative Rashida Tlaib (D-MI); and
  • Representative Jennifer Wexton (D-VA).

New House Financial Services Committee Chair Maxine Waters Outlines Priorities

New Chair of the House Financial Services Committee (“FSC”) Maxine Waters (D-CA) outlined Committee priorities.

In remarks delivered before the Center for American Progress, Chair Waters outlined the following FSC priorities: the Consumer Financial Protection Bureau (“CFPB”), Housing, Diversity and Inclusion, International Affairs (particularly governance at the International Monetary Fund and World Bank) and Russia sanctions. She also stated that she plans to address, on a bipartisan basis, long-term reauthorization and reform of the National Flood Insurance Program (NFIP), Terrorism Risk Insurance (TRIA), and the reauthorization of the Export-Import Bank.

Chair Waters stated that her ongoing priority is to ensure a strong CFPB and robust financial regulation that protects consumers, investors and the economy. She criticized Congressional Republicans and the Trump administration for weakening the CFPB, citing former Acting Director of the CFPB Mick Mulvaney’s decision to fire all members of the Consumer Advisory Board. Ms. Waters stated that she will introduce a bill that “reverses many of [Mick Mulvaney’s] harmful actions.”

Ms. Waters also stated that she will focus the FSC on issues related to FinTech. In particular, she said, it is critical that the FSC work to foster “responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks and credit unions.”

In addition, Ms. Waters expressed concerns over the impact of the government shutdown on programs under the jurisdiction of the FSC. In particular, she noted the impact of the shutdown on SEC enforcement, and potential delays to initial public offerings. She also described the impact of the shutdown to key programs under FHA and HUD.

Basel Committee Oversight Body Approves Final Version of Market Risk Framework

The oversight body of the Basel Committee on Banking Supervision (“BCBS”), and the Group of Central Bank Governors and Heads of Supervision (“GHOS”), approved final revisions to the market risk framework. Separately, GHOS also approved the BCBS’s strategic priorities and work program for 2019.

The revised Minimum Capital Requirements for Market Risk replaced an earlier version published in January 2016. The January 2016 market risk framework, which was intended to enhance consistency of implementation, as well as lower arbitrage opportunities between capital requirements for market risk and credit risk, outlined the scope of application for market risk capital requirements. The revised market risk framework will become effective on January 1, 2022.

The revisions to the January 2016 market risk framework include:

  • a simplified standard approach to be used by banks that have smaller or non-complex trading portfolios;
  • clarifications as to the scope of exposures subject to market risk capital requirements;
  • improvements in the standardized approach to treatments of foreign exchange risk and index instruments;
  • changes to the standardized approach risk weights applicable to general interest rate risk and foreign exchange risk, as well as specific exposures subject to credit spread risk;
  • adjustments to the assessment process to determine whether a bank’s internal risk management models appropriately reflect trading risks; and
  • changes to the requirements for the identification of risk factors for internal modeling.

The BCBS maintains a two-year work program that outlines strategic priorities for its policy, supervision and implementation activities. The BCBS strategic priorities and work program for 2019 will focus on four central themes: (i) finalizing policy reforms and tackling new policy initiatives, (ii) assessing and monitoring the effect of post-crisis reforms, (iii) fostering strong supervision and (iv) ensuring the “full, timely and consistent implementation of the Committee’s post-crisis reforms.”

FDIC Examines Bank Credit Risk Grading Systems

In its latest issue of Supervisory Insights, the FDIC Division of Risk Management Supervision (“DRMS”) reported that strong credit grading systems typically have “identifiable processes” and a “sound governance framework.”

The article, “Credit Risk Grading Systems: Observations from a Horizontal Assessment,” was drawn from examiner observations about the loan risk grading systems at certain state nonmember banks. The FDIC DRMS discovered that:

  • smaller institutions used “expert judgment”-based systems, in which a loan officer or relationship manager gives a grade based on his or her knowledge of the credit;
  • as banks grew bigger, management would switch from an expert judgment-based system to a quantitative scorecard or modeled approach consisting of qualitative adjustments;
  • certain institutions buy credit grading scorecard and statistical models from external vendors;
  • various institutions that depended on internal data were not retaining their “historical borrower information in a database or other centralized repository”;
  • certain banks were able to “assess grade accuracy well by comparing key borrower financial metrics and the internal grades across loans of a similar type”;
  • credit risk grading systems differ across the banking system;
  • risk grading can help in the implementation of the Current Expected Credit Loss accounting standard; and
  • efficient credit risk grading systems depend on timely and accurate data, among other things.

Regulators Encourage Lenders to Work with Consumers Impacted By Shutdown

In a joint press release, the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC, the Consumer Financial Protection Bureau, the National Credit Union Administration and the Conference of State Bank Supervisors encouraged financial institutions to work with consumers impacted by the federal government shutdown. The agencies noted that affected borrowers may face hardship with regard to making payments on financial obligations, including mortgages, student loans, car loans, credit cards and other types of debt.

Agencies Propose Changes to Volcker Proprietary Trading and Name-Sharing Restrictions

The FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency, the SEC and the CFTC (collectively, the “agencies”) proposed excluding certain community banks from the Volcker Rule. In addition, the proposal would permit a banking entity to share a name with a covered fund that it organizes and offers under certain circumstances. The proposal would amend the regulations implementing the Volcker Rule, consistent with the statutory amendments made pursuant to Sections 203 and 204 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).

Pursuant to Section 203 of the EGRRCPA, the proposal would exclude a community bank from the restrictions of the Volcker Rule if both of the following conditions are met: (i) it has total consolidated assets equal to or less than $10 billion, and (ii) its trading assets and liabilities are equal to or less than five percent of its total consolidated assets.

In addition, pursuant to Section 204 of the EGRRCPA, the proposal would allow a covered fund to share “the same name or a variation of the same name with . . . an investment adviser to the fund, subject to the conditions” that (i) the investment adviser is not, and does not share the same name as, “an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company”; and (ii) the name does not contain the word “bank.”

Comments on the proposal must be received no more than 30 days following its publication in the Federal Register.