The Federal Deposit Insurance Corp.’s Office of the Inspector General says that Sac City, Iowa-based Citizens Bank failed last year due to poor risk management and an overreliance on lending to trucking firms.
Bloomberg News
WASHINGTON — The Federal Deposit Insurance Corp.’s Office of Inspector General found lax lending and poor risk management led to the downfall of Citizens Bank in Sac City, Iowa, in November 2023 and its $14.8 million hit to the Deposit Insurance Fund.
As early as 2014, the report says the $65 million-asset bank — 100%-owned by the family of Thomas Lange, the bank’s chairman and president — made ill-informed commercial loans to trucking companies without adequate risk mitigation, board oversight or business expertise. Those loans were heavily strained as supply-chain snags during the pandemic imposed increased fuel, insurance and repair costs, making it increasingly hard for borrowers to repay.
“Citizens Bank compounded these issues by advancing additional funds to problem borrowers through overdrafts, often in excess of the state’s lending limit, and without first obtaining current financial information or conducting proper collateral analysis,” the OIG wrote. “The significant deterioration in the bank’s loan portfolio and operating losses led to a serious depletion of the bank’s capital and stressed its liquidity, ultimately resulting in its failure.”
According to the OIG, regulators caught wind of trouble at Citizens around the same time as the supply-chain issues began to emerge. At that time, management of the bank ramped up trucking loans outside of its primary trade area, and its corresponding poor credit underwriting and administrative weaknesses raised red flags for FDIC examiners.
From 2020 onward, the FDIC took a string of regulatory actions, including filing a “matters requiring board attention” report in a March 2020 examination. Both the FDIC and the Iowa state bank regulator identified credit administration and loan underwriting deficiencies in their respective April 2021 and July 2022 examination reports. The regulators also found the bank had violated Iowa’s ban on state banks’ granting loans and extensions of credit that exceed 15% of the firm’s aggregate capital to a single borrower.
In May 2023, a joint review by the FDIC and Iowa Division of Banking revealed serious issues at Citizens, leading to a downgrade in its supervisory rating. Despite a consent order issued in August 2023, the bank’s financial condition deteriorated further by October. Consequently, the FDIC declared Citizens “critically undercapitalized” and took over as receiver on Nov. 3, 2023.
The report said Citizens’ impact on the Deposit Insurance Fund was average relative to losses over the last five years, and thus not sufficient to warrant a more comprehensive review by the agency’s watchdog.
The FDIC OIG is mandated by law to conduct a preliminary investigation of a state bank regulator’s stated cause for a failure when the DIF suffers a loss of less than $50 million and to decide whether further review is needed. Losses above that threshold automatically receive a full investigation.
The OIG, however, said Thomas Lange had a multitude of conflicts of interest in loans administered by the bank, which it says have been communicated to the appropriate authorities. These conflicts were determined not to be contributing factors to the bank’s failure, which was the main concern of the report.
The OIG also found that the FDIC’s supervision itself did not contribute to the failure. In fact, the agency repeatedly pinpointed the problems, issued notices and took steps to address the concerns.
“Ultimately,” the OIG wrote, “the bank’s inaction to address these supervisory recommendations resulted in its failure.”
Michael Barr, Federal Reserve vice chair for supervision, said he is working with other Fed officials to reach consensus on the best path forward for their proposed capital reforms.
During a Friday afternoon speaking engagement at the University of Michigan, Fed Vice Chair for Supervision Michael Barr discussed the so-called Basel III endgame, which he said had sparked “lots of controversy” in the banking sector.
Barr said the Board of Governors has seen the 400-plus comments — most of which are critical of the framework’s calibration — and is in the process of making corresponding changes.
“We’re working very hard to see what that will look like,” Barr said. “I’m working very closely with Chair [Jerome] Powell and other members of the board of governors to reach a consensus.”
Earlier this month, during testimony in front of the House Financial Services Committee, Powell told lawmakers that “broad and material” changes were coming to the proposed rule, noting that he was open to issuing an entirely new proposal, should significant modifications be needed. Powell has also emphasized the importance of building consensus through the rulemaking process.
Barr said the board has “some ideas” about how it will amend the proposal, but said it would need more time to settle on a course of action.
During the Michigan event, Barr discussed a wide range of topics, including bank liquidity, distress in the commercial real estate sector and the Fed’s independence.
Liquidity
Officials from the Fed and other regulatory agencies have promised to introduce changes to liquidity requirements at some point this year. On Friday, Barr said one area of focus is how to treat assets on a bank’s balance sheet that have not been designated as available for sale.
“We’re looking at what are the right kinds of assumptions banks should have about taking held-to-maturity securities and converting them into cash,” Barr said.
He also noted that the Fed is continuing to encourage banks to make sure they are ready to borrow from the central bank’s emergency lending facility, the discount window.
“The message we want to convey is that it is okay to use the discount window,” Barr said. “We want to get rid of that stigma because if banks feel that stigma they might be less likely to use the discount window when they need it.”
Since last year’s bank failures, Barr said the Fed has seen nearly $1 trillion of new assets pledged to the discount window, bringing the total amount of ready collateral at the facility to roughly $3 trillion.
Commercial real estate risks
Barr called the distress in the commercial real estate sector an “old school risk,” one that is significant but manageable.
Barr warned observers not to view the commercial real estate lending space as a monolith, noting that while offices in some major cities are under stress — due to plummeting post-pandemic occupancy levels and rising interest rates — other types of commercial property are continuing to perform well. He cited hotels, apartments and senior living facilities as subsectors of strength.
“When people talk about commercial real estate risk, it’s really important to think about the heterogeneity of those risks and their distribution throughout the banking system,” he said.
Central bank independence
Barr defended the Fed’s position as an independent agency, one that is overseen by Congress but able to set its own agenda and craft its own policies, which he said has served the institution and the nation well.
“We don’t talk about politics, we don’t make decisions based on politics, that’s really important for our credibility,” he said. “That’s true of monetary policy, it’s true of supervision of regulation, and it’s true of our oversight of the payments system.”
Treasury Secretary and Financial Stability Oversight Council Chair Janet Yellen speaks with Federal Reserve Vice Chair for Supervision Michael Barr and Securities and Exchange Commission Chair Gary Gensler following an FSOC meeting in December 2022. Even without big moves by FSOC to rein in nonbank activities, regulators have made more incremental moves to level the regulatory landscape between bank and nonbank financial firms.
Bloomberg News
WASHINGTON — The 2008 financial crisis amply illustrated the potential for nonbank financial firms to pose a risk to the broader financial system. But the increasing growth and interconnectedness of those firms is compelling regulators to rely on the limited tools they have to check that risk.
Ian Katz of Capital Alpha Partners says regulators are keeping a watchful eye on the expanding connections between banks and the alternative asset management sector.
“I think this has been building gradually for a long time,” said Katz. “More financial activity has moved outside the banking sector in recent years, and a lot of that activity isn’t under direct federal oversight.”
Evidence from a Financial Stability Board publication in 2023 showed nonbanks’ market share has grown since 2008. FSB estimated that nonbanks collectively have more than $200 trillion in total assets and account for about half of the global financing activities — a higher level than during the financial crisis. Katz noted that while bank regulators cannot directly oversee other sectors, they can engineer solutions that protect the banking sector from nonbank exposure.
“[Regulators] believe that non-banks don’t operate under the same tough regulations they face, and it’s a fair point that banks are regulated more strictly than non-bank financials,” Katz wrote. “At the very least, the bank regulators want to keep the riskiest and sketchiest stuff away from the banks they oversee.”
Regulators’ strongest tool to rein in risks from nonbanks is housed with the Financial Stability Oversight Council, an interagency commission created by Dodd-Frank tasked with identifying and curtailing risks to the broader financial system.
While its power to designate nonbanks systemically risky — thereby subjecting such firms to enhanced prudential standards similar to those big banks face — was weakened through litigation and by regulation during the Trump administration, FSOC reclaimed its designation power last year. But David Portilla, a lawyer at Davis Polk and former FSOC staffer argues that may not reduce the risks posed by nonbanks overnight.
“There doesn’t seem to be an indication that the FSOC is working on entity designations in regards to the asset management industry,” said Portilla.
While entity-level designations don’t appear imminent, Katz notes that regulators still can exercise some limited indirect power to hedge risks from nonbanks.
“What they can do is have some influence indirectly,” Katz wrote in an email, “by increasing scrutiny or tightening rules around who banks can do business with [or] what they can have on their balance sheets.”
Indeed, federal regulators have been floating a variety of new policies related to nonbanks over the past year. Federal Reserve Vice Chair for Supervision Michael Barr called for banks to exercise greater diligence toward counterparty risks and said banks should maintain appropriate margins to pad against a hedge fund collapse like that of Archegos in 2021. The agency also incorporated a counterparty risk scenario into this year’s stress tests to gauge banks’ resilience to the collapse of a major nonbank counterparty.
Another top regulator, acting Comptroller of the Currency Michael Hsu, recently called for FSOC to establish a “tripwire approach” to consider designating certain systemically important nonbanks — like hedge funds — which meet certain metrics.
Additionally, Federal Deposit Insurance Corp. Chairman Gruenberg called for FSOC to apply tailored enhanced prudential standards and reporting requirements to particular nonbanks like open-ended mutual funds, hedge funds and other nonbank lenders.
Treasury’s Financial Crimes Enforcement Network also recently proposed a rule subjecting investment advisors to AML/CFT reporting requirements.
Harry Stahl, director of business and solutions strategy at FIS — a leading regulatory technology provider to the nonbank industry — notes the nonbank sector has noticed the spotlight shining on their industry and reacted accordingly.
“There’s a lot more sense of thinking about who are the players in the ecosystem and making sure that everybody is well organized, buttoned down and complying with the critical regulatory concerns,” said Stahl. “It’s not surprising that this would be happening now when we look at what’s going on in the market.”
Bryan Corbett, president and CEO of the Managed Funds Association — a trade association that represents asset management firms like hedge funds — argued that nonbanks are less systemically risky and already sufficiently regulated. Unlike banks, he said, their funding is not subject to the same kinds of run risk, and the capital such nonbank firms manage comes from institutional investors and is locked away for some time.
“FSOC’s SIFI designation and other attempts to apply banklike regulation to private funds is misguided and will harm U.S. capital markets,” Corbett said. “There is already a robust regulatory regime in place for alternative asset managers that grants regulators insight into the activities and health of funds and the tools to ensure the market is well regulated.”
Banks have appeared to seize on uneasiness about growing influence of nonbanks to argue against the Basel endgame capital reforms proposed last fall. They argue if regulators force banks to fund certain activities with greater levels of equity — as is the key thrust of the proposal — that will drive such activities into the hands of the nonbank sector. Katz notes this is one rare instance where the regulators may see eye to eye with the industry.
“The regulators trying to get their arms around nonbank activity does respond to the criticism that the Basel endgame pushes activity outside the regulated banking sector,” he wrote. “I think that’s one of the criticisms of Basel that the regulators view as valid.”
Dennis Kelleher, CEO of consumer watchdog Better Markets, said he is equally concerned with less-regulated nonbanks increasing financial services intermediation. However, he argues the solution is not to ease up on banks, but regulate banks and nonbanks alike to prevent regulatory arbitrage.
“If the nonbank sector is not regulated, that’s no reason to also not regulate the banking sector,” Kelleher said. “That would be doubling down on disaster and guaranteeing a catastrophic financial crash like or worse than 2008. Strengthening the banking sector is only half the battle of preventing financial crashes, contagion and bailouts, as proved in 2008, 2020 and 2023.”
While not able to speak to the specifics of the posting, nor about any possible actions the regulator might take, the Community Home Lenders of America “is thrilled that they’re jumping into this,” Scott Olson, its executive director, said in an interview.
“We’ve actually used this phrase [junk fees] ourselves a couple of years or so ago” he said in regards to click fees lenders are charged by third party vendors, which are passed on to consumers.
Others in the industry had a hard time understanding where the CFPB was coming from.
“The CFPB’s blog post is baffling and reveals little understanding of how the mortgage market works or awareness of its own regulations that provide for full fee transparency and limits on what can be charged,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in a lengthy statement.
“The fees mentioned are clearly disclosed to borrowers well before a home purchase on forms developed and prescribed by the Dodd-Frank Act and the CFPB itself,” he added, referring to the TILA-RESPA Integrated Disclosures, also known as TRID. One of those disclosures, the loan estimate, is given when the borrower contacts the originator and is supposed to be used to shop.
The other form – the closing disclosure presented at the end of the process – must be within certain tolerances of the data provided on the loan estimate.
“In 2020, the CFPB issued a report praising its own rule for improving consumers’ ability to locate key information, compare terms and costs between initial disclosures and final disclosures, and compare terms and costs across mortgage offers,” Broeksmit said.
But in Olson’s view, “transparency is not the same as competition.”
As far back as 2003, if not even earlier, the government has had so-called mortgage junk fees in its crosshairs. Mel Martinez, Department of Housing and Urban Development secretary under President George W. Bush, said in a speech before the National Community Reinvestment Coalition almost exactly 11 years ago that members of Congress did not understand that reform proposal would help consumers understand the mortgage process and the costs involved so they don’t become “victims” of junk fees and broker abuse.
The CFPB, in its recent post, took its own shot at the lender policy portion of title insurance, saying the borrower has no control or options.
“Instead of paying this fee themselves, lenders make borrowers pay the cost,” said the blog posting authored by Julie Margetta Morgan, associate director. “The amount that borrowers pay for lender’s title insurance is often much greater than the risk.”
“We think that opening up the line of sight on some of these things is reasonable where there really is not competition,” Olson said.
The American Land Title Association issued commentary on the CFPB blog.
“Reform of mortgage closing costs is unnecessary,” the ALTA response said. “The contradictory use of the term ‘junk fee’ conflicts with the White House’s own definition, which cites the lack of disclosure of the fee being charged.”
Credit reports also were specifically mentioned as a problem area in the CFPB posting, claiming the business lacks competition and choice.
CFPB is also looking for consumer comment on the payment of discount points, although the posting does not distinguish between temporary and permanent rate buydowns.
“We are paying particular attention to the recent rise in discount points,” the posting said. “A higher percentage of borrowers reported paying discount points in 2022 than any other years since this data point was first reported in 2018.”
The agency said 50.2% of home purchase borrowers paid some discount points in 2022, with the median dollar amount being $2,370, up from 32.1% and $1,225 one year earlier.
Gemini Trust, the crypto exchange founded by twin entrepreneurs Cameron and Tyler Winklevoss, will return at least $1.1 billion to customers though the Genesis Global Capital bankruptcy as part of a settlement with the New York Department of Financial Services.
The New York-based firm will also pay a $37 million fine for various compliance failures to the New York Department of Financial Services, Superintendent Adrienne A. Harris said in a statement Wednesday.
Gemini is returning the funds to customers who lost money through the Gemini Earn program that the exchange ran together with now-bankrupt lender Genesis Global. Gemini also agreed to contribute $40 million to Genesis’s bankruptcy for the benefit of Earn customers in coordination with the bankruptcy court.
“Gemini failed to conduct due diligence on an unregulated third party, later accused of massive fraud, harming Earn customers who were suddenly unable to access their assets after Genesis Global Capital experienced a financial meltdown,” Harris said. “Today’s settlement is a win for Earn customers, who have a right to the assets they entrusted to Gemini.”
The Earn program, which was launched in early 2021, let more than 200,000 Gemini users — including almost 30,000 New Yorkers — lend out their coins through Genesis for yield. Genesis stopped withdrawals in late 2022, and filed for bankruptcy in early 2023. Gemini failed to conduct ongoing due diligence into Genesis, or to maintain adequate reserves throughout the running of Earn, the department said.
The agency said that outside of Earn, Gemini also “engaged in unsafe and unsound practices that ultimately threatened the financial health of the company.” Its affiliate, Gemini Liquidity LLC, collected hundreds of millions of dollars in fees that could have gone to Gemini, and that weakened the company’s financial condition. The department said it found various management and compliance deficiencies in its investigation of Gemini.
In a post on the X platform, Gemini noted that under the settlement “all Earn users” will receive “100% of their digital assets back in kind” if the Genesis bankruptcy is approved by the court. A Gemini representative didn’t immediately return a request for comment.
The settlement is the latest attempt by various governmental agencies, including the US Securities and Exchange Commission, the Justice Department and the Commodity Futures Trading Commission, to clean up crypto. Recent enforcement actions have included crypto exchanges Binance, Kraken and Coinbase Global.
The SEC charged Gemini and Genesis for the unregistered offer and sale of securities through the Earn program in January 2023. The New York Attorney General recently revised a lawsuit seeking restitution for Earn users. Genesis recently settled with the state. Gemini, Genesis and its parent company Digital Currency Group are also involved in a legal battle.
The New York agency has the right to bring further action against Gemini if it doesn’t return at least $1.1 billion to Earn customers after the resolution of Genesis’s bankruptcy.
The department authorized Gemini to engage in virtual currency business in 2015.
“The consumer typically would not know if the check originator had sufficient funds in their bank account, whether the account was closed, or whether the signature on the check is valid,” wrote California Attorney General Rob Bonta.
David Paul Morris/Bloomberg
California Attorney General Rob Bonta is warning smaller banks and credit unions about the consequences of hitting consumers with certain penalty fees, arguing that the charges likely violate both state and federal law.
Bonta, a Democrat, highlighted two specific kinds of fees in a letter to California-chartered banks and credit unions that have less than $10 billion of assets. The Consumer Financial Protection Bureau lacks supervisory authority for financial institutions whose total assets fall below the $10 billion threshold.
First, the AG warned the banks and credit unions about charging overdraft fees that aren’t reasonably foreseeable. Such fees sometimes get assessed when an account shows a positive balance at the time the transaction is authorized, but a negative balance at the time of settlement.
“The complexity of how payments are processed, authorized, and settled by financial institutions make it difficult for the average consumer to make an informed decision on whether to use overdraft protection and incur an overdraft fee for any particular transaction,” Bonta wrote in the letter, which was sent this week.
Bonta also focused on fees that get charged to customers who deposit checks that are later returned because they can’t be processed against the account of the person who wrote them. Customers often deposit checks without the knowledge that they’re bad.
“The consumer typically would not know if the check originator had sufficient funds in their bank account, whether the account was closed, or whether the signature on the check is valid,” Bonta wrote.
The letter was sent to 197 state-chartered banks and credit unions, according to the California attorney general’s office.
Diana Dykstra, president and CEO of the California Credit Union League, said the group is carefully reviewing the message being sent by Bonta’s office.
“Credit unions have long been dedicated to serving their members diligently, fostering trust through personalized financial services,” Dykstra said in an email. “We are committed to spotlighting the credit union difference with state legislators in Sacramento on the topic of overdraft protection.”
A spokesperson for the California Bankers Association did not respond Friday to requests for comment.
The focus by California officials on penalty fees charged by small banks and credit unions dovetails with the Biden administration’s effort to crack down on similar practices at big banks.
Bonta wrote in his letter that charging the two kinds of fees he highlighted likely violates both California’s Unfair Competition Law and the federal Consumer Financial Protection Act. Federal banking regulators have previously taken similar stances on the two fees’ legality under federal law.
Such disclosures about overdraft fees are already required in California by both state-chartered banks and credit unions, thanks to a state law enacted two years ago.
Data from 2022 was published in a report last year by the California Department of Financial Protection and Innovation. It showed that California-chartered credit unions were more likely than their counterparts in the banking industry to rely on overdraft fees as a substantial revenue source.
In 2022, no California-chartered banks got more than 6.1% of their total income from overdraft fees and nonsufficient funds fees, according to the report. By contrast, 25 state-chartered credit unions got more than 6.1% of their total income from overdraft fees and NSF fees.
NSF fees may be charged when a financial institution denies a transaction because the customer’s account lacks sufficient funds.
Under a consent order with the Federal Deposit Insurance Corp., the $290 million-asset bank must implement a board-supervised strategic overhaul that boosts its risk controls, increases its capital and results in the offboarding of some of its fintech partners.
The order took effect on Jan. 29. It was first reported on Friday by Fintech Business Weekly and made public later in the day.
Jonah Crane, a partner at the advisory and investment firm Klaros Group, said in an interview last month that he expects every bank with a banking-as-a-service line of business to see some level of regulatory action over the next year.
Many banks dove into the sector to add deposits and fee revenue but didn’t appropriately allot resources for staff and technology, Crane said. Cross River Bank and First Fed Bank are among the financial institutions that have had to rein in their banking-as-a-service businesses due to compliance failures.
Lineage was founded when father-and-son duo Richard and Kevin Herrington acquired a small, local bank and began ramping up its banking-as-a-service business in 2021.
Since then, the bank has partnered with Synctera and Synapse, two intermediary companies that provide banking-as-a-service technology to connect banks with fintechs. It has grown its assets and deposits by more than 900%, according to FDIC call reports. Lineage’s assets grew from $27 million at the end of 2020 to nearly $300 million at the end of 2023.
In a January 2023 blog post, the bank said that “due to our partnerships with organizations like Synctera and Synapse, we’ve been able to tap into the market with great success. We look forward to expanding upon this BaaS growth here in 2023.”
The FDIC is now requiring Lineage to limit annual growth of assets and liabilities to under 10%, terminate “significant” fintech partnerships and increase its Tier 1 capital.
Lineage did not respond to requests for comment. The FDIC declined to comment.
A Synctera representative said in an email that it’s “unfortunate to see [Lineage] leaving the fintech space,” and that the bank is helping transition fintech partners to new banks. Synapse declined to comment.
In the wake of the FDIC’s action, Lineage has shaken up its leadership team, tapping Jeffrey Hausman as its chairman, and naming Carl Haynes, who was previously chief banking officer, as CEO, the Nashville Business Journal reported on Thursday. Hausman and Haynes replaced Richard and Kevin Herrington, who founded Lineage in 2020 through the acquisition of Citizens Bank and Trust Company.
Konrad Alt, a partner at Klaros Group, told American Banker in November that banks should look at recent regulatory actions as providing a blueprint for their own banking-as-a-service risk strategies.
“The message to banks that are in this space is that if you want to be providing banking as a service, you need to have first-class compliance and risk management,” Alt said. “That’s a message the regulators have been communicating pretty consistently.”
“The CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year,” Rohit Chopra, the agency’s director, says in response to its findings that the largest credit card issuers charge much larger APRs than smaller issuers.
Al Drago/Bloomberg
The largest credit card issuers charge significantly higher annual percentage rates than smaller issuers, resulting in some cardholders’ paying as much as $400 to $500 a year extra and the big companies’ earning billions of dollars in additional interest income, the Consumer Financial Protection Bureau said.
The CFPB on Friday released a survey of 84 banks and 72 credit unionsthat found large credit card issuers offered the highest interest rates across all credit scores. The survey comes as the CFPB is expected to finalize a rule soon that would slash credit card late fees to $8, potentially wiping out up to $9 billion a year in profits for banks and credit card issuers.
The survey results also coincide with the CFPB’s narrative under Director Rohit Chopra that the largest banks are charging consumers so-called junk fees primarily to pad their bottom lines. The survey found that small banks and credit unions offer lower interest rates on average across all credit-score tiers than the largest 25 credit card companies.
The median interest rate charged by large credit card companies was 28.2% compared with 18.15% charged by small issuers, to consumers with good credit — typically credit scores between 620 and 719, the CFPB said.
“Our analysis found that the largest credit card companies are charging substantially higher interest rates than smaller banks and credit unions,” Chopra said in a press release.“With over $1 trillion in credit card debt outstanding, the CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year.”
The CFPB found that the APR spread between the top 25 issuers and the smallest ones was between 8 to 10 percentage points, with only a slight variation based on consumers’ credit scores. The survey was based on data collected in the first half of 2023 including data on so-called purchase APRs, which captures the interest rate credit card issuers charge on purchases when a consumer carries a balance.
The CFPB has said that credit card companies’ margins are increasing as they price APRs further above the prime rate, which the bureau has said signals a lack of price competition. Credit card companies are offering more generous rewards and sign-up bonuses to win new accounts, which largely benefits consumers with higher credit scores who pay their balances in full each month.
The CFPB has long sought to explore ways to promote transparency and comparison shopping on purchase APRs — a major cost of credit cards that is often unknown to consumers prior to card issuance.
Lindsey Johnson, president and CEO of the Consumer Bankers Association, issued a strongly worded rebuttal of the CFPB’s statistics and statements, homing in on the bureau’s assertions that the credit card market is not competitive.
“The CFPB’s own data simply does not support their assertions about competition in the credit card marketplace,” said Johnson, noting that nearly 4,000 banks issue more than 640 individual credit card products. “This may be the only time that anyone has pointed to a market with vastly different prices as an indication of competition problems.”
CBA, which represents most large credit card companies and banks, took issue with the CFPB’s description that the credit card market is highly concentrated and “anti-competitive.” She said how interest rates are calculated and whether fees are assessed varies greatly and can depend on product features such as rewards such as cash-back benefits.
“In a world where only one price is offered, consumers lose — even if it’s the ‘lowest-price’ option,” she said. “Rather than bolstering this already highly competitive and well-regulated market, the CFPB seems to be driving consumers to a one-size-fits-all world focused on specific criteria that the CFPB chooses, as opposed to the preferences of the people we should all be working to serve.”
The CFPB’s research found that the top 30 credit card companies represent about 95% of credit card debt, while the top 10 companies dominate the marketplace. The CFPB also listed 15 issuers—including nine of the largest ones in the country — that reported at least one product with a maximum purchase APR over 30%. Many of the high-cost cards are co-branded cards offered through retail partnerships.
The top issuers include JPMorgan Chase, American Express, Citigroup, Capital One Financial, Bank of America, Discover Financial, U.S. Bancorp, Wells Fargo, Barclays and Synchrony Financial.
A few consumer groups and nonprofits aligned glommed on to the CFPB’s report to blast large banks.
“The CFPB’s report is a clear indictment of how big banks, emboldened by unchecked mergers and consolidation, exploit their market dominance to lock consumers in so they can levy exorbitant fees and interest rates,” said Morgan Harper, director of policy and advocacy at the American Economic Liberties Project, a progressive nonprofit group.
The CFPB said it has taken a number of steps to address what it claims are problems in the market including promoting switching through open banking, scrutinizing bait-and-switch tactics on credit card rewards, closing loopholes that allow credit card issuers to extract junk fees, and promoting credit card comparison shopping.
The agency recently updated its credit card data webpage and said it continues to expand its reporting on credit card data.
Alessandro “Sandro” DiNello spoke Wednesday about the turnaround of Flagstar Bancorp. “It took 10 years to do that, but we got it there,” the former Flagstar CEO said. “And if you do it the right way, you do it gradually, and you don’t try to do things too quickly, and you keep safety and soundness in the forefront, it can be done.”
When Alessandro “Sandro” DiNello spoke to analysts early Wednesday morning, less than an hour after being announced as executive chairman of New York Community Bancorp, one of the first points he made was about his experience in navigating tricky regulatory matters.
DiNello served as CEO of Flagstar Bancorp from 2013 until its 2022 acquisition by New York Community. During that nine-year stretch, Flagstar contended with numerous regulatory issues that had emerged from the 2008-2009 mortgage crisis.
“We were a monoline mortgage company that had been decimated by the Great Recession,” DiNello said Wednesday, recalling his time at Michigan-based Flagstar. “That was a difficult time, but we made our way through it by building the right team, building a strong risk and compliance framework, and by building the right business model.”
Later in the call, DiNello, a 1975 graduate of Western Michigan University, noted that he started his career as a bank examiner.
On Jan. 31, the bank announced a net loss of $260 million in the fourth quarter, driven by a large reserve increase. It also cut its dividend by 70%, which executives said was necessary to build capital. The company’s stock price fell by 59% over the following week.
Industry observers believe that the bank’s regulators were likely responsible for the surprise bad news, though New York Community has been tight-lipped about what happened.
The same day the earnings report was released, Jefferies downgraded New York Community’s stock from “buy” to “hold,” citing an “unexpectedly faster regulatory mandate” to comply with regulations for larger banks.
It now falls largely to DiNello to navigate the choppy waters ahead. While Thomas Cangemi is still New York Community’s president and CEO, it was DiNello who answered most of the questions from stock analysts on Wednesday. He made the case that he has the right skills and experiences to engineer a turnaround of the $116.3 billion-asset bank.
Early in his career, DiNello worked at Jackson, Michigan-based Security Savings Bank, which was acquired in 1994 by a bank that later became Flagstar.
Over the following decades, DiNello’s roles included leading government affairs for the bank. He also served as head of branch banking, an experience that he suggested will be useful in his new role at New York Community.
“I built the Flagstar branch network. These people know how to take care of customers,” DiNello said Wednesday on the conference call, adding that New York Community’s front-line bankers have a similar rapport with their clients.
“And because of that, we have seen virtually no deposit outflow from our retail branches,” he said just hours after New York Community released an update on its deposits in an effort to convince investors that its funding was still solid.
When DiNello became Flagstar’s CEO in 2013, he took over from a predecessor who’d lasted only eight months in the job. Flagstar, which was largely a mortgage lender, was in a tough spot. Between 2007 and early 2012, the company had lost nearly $1.4 billion.
In 2010, Flagstar entered into a supervisory agreement with the Federal Reserve that required the bank to submit an annual capital plan and receive a written non-objection from the Fed before paying a dividend or repurchasing stock.
Then in October 2012, the lender entered into a consent order with the Office of the Comptroller of the Currency, which related to its regulatory capital, enterprise risk management and liquidity, among other matters.
There was more regulatory trouble ahead. In September 2014, the Consumer Financial Protection Bureau ordered Flagstar to pay $37.5 million in fines and restitution in connection with allegations that it blocked homeowners from receiving foreclosure relief.
But over time, Flagstar’s crisis-era regulatory headaches got resolved. The OCC consent order was lifted in December 2016. Nearly two years later, so was the Fed’s supervisory agreement.
Flagstar’s financial results also showed gradual improvement during DiNello’s time at the helm. Its net interest margin was under 2% when he became CEO, DiNello said Wednesday, but it rose to around 4% by the time the bank was acquired.
“It took 10 years to do that, but we got it there,” DiNello said. “And if you do it the right way, you do it gradually, and you don’t try to do things too quickly, and you keep safety and soundness in the forefront, it can be done.”
Between 2015 and 2020, Flagstar recorded net income of more than $1.3 billion, including $538 million during the first year of the COVID-19 pandemic, as the U.S. mortgage market boomed.
During Flagstar’s quarterly earnings call in January 2021, DiNello described 2020 as the most successful year in the company’s history. Three months later, New York Community announced plans to buy Flagstar in an all-stock deal valued at roughly $2.6 billion.
A month before the deal was announced, Flagstar resolved one last crisis-era regulatory matter. The bank settled its obligations under a 2012 settlement with the Department of Justice, which related to false certifications on government-backed loans that went bad. Flagstar agreed to pay $70 million, which was $48 million less than it had originally appeared to owe.
When the New York Community acquisition closed in December 2022, DiNello became the combined company’s nonexecutive chairman. The events of the last two weeks have pushed into more of a day-to-day leadership role.
Since New York Community’s tailspin began, DiNello and other executives have been buying shares in the company. The purchases are similar to those made by regional bank CEOs last spring, as they sought to reassure investors they thought their banks were sound.
On Friday, DiNello bought more than $200,000 of shares, according to a securities filing. The company’s stock rose 17% after the disclosure of the executives’ stock purchases.
While Friday’s insider stock purchases instilled some “calmness,” showing that deposits are stable or growing will be key, said Peter Winter, an analyst at D.A. Davidson.
“It’s all going to come down to deposits — it really is,” Winter said. “If they come out with a midquarter update, and deposits are down, the stock is going to sell off.”
Christopher McGratty of Keefe, Bruyette & Woods is among the analysts who have welcomed DiNello’s new role. He wrote in a research note that DiNello was “the architect” of Flagstar’s operation and regulatory restructuring.
“DiNello has a strong reputation of turning around Flagstar Bancorp,” McGratty wrote, adding that the executive’s direct communication during Wednesday’s conference call, which included owning up to the challenges facing New York Community, should help start to restore confidence.
“He is well known to the Street, and his experience working through these matters should help NYCB, in our view,” McGratty added.
Some of the challenges that New York Community faces revolve around meeting the expectations that regulators have for banks with more than $100 billion of assets — a threshold that the bank crossed when it bought parts of the failed Signature Bank last spring.
During Wednesday’s call, DiNello spoke about the company’s plans to reduce its commercial real estate concentration, sell nonstrategic assets and build capital. In other forums, he has spoken about his leadership traits.
“I am willing to take risks — calculated ones,” he said in a 2017 interview with the Detroit Free Press. “If you are smart about the risks you take and you do so in a disciplined fashion, it works out.”
Daniel Tamayo, an analyst at Raymond James, said that DiNello proved to be a capable leader at Flagstar during a challenging time for the bank.
“I remember thinking, when I picked up coverage of Flagstar, ‘Why would they have someone that was there when it almost went under to lead them out of it?’” Tamayo said. “DiNello ended up being the perfect guy for the job.”
Scott Sanborn, LendingClub’s CEO, said the company has more flexibility with its capital position after exiting an operating agreement with the Office of the Comptroller of the Currency.
Christopher Goodney/Bloomberg
An operating agreement between LendingClub and its regulator expired Friday, which provides the company an expanded runway for growth as it hits the three-year anniversary of its acquisition of a bank.
The San Francisco-based fintech entered into an agreement with the Office of the Comptroller of the Currency back in 2021, when it bought Radius Bancorp. The pact imposed capital constraints on LendingClub in an effort to temper fast growth.
In an interview, LendingClub CEO Scott Sanborn said that fintechs get huge benefits from obtaining bank charters, but those changes also bring more responsibility and regulatory oversight.
“The operating agreement, by design, in some ways slows you down,” Sanborn said. “It does that for very good reasons: to make sure you understand the obligations that you now have to manage your risk, and to create a thought process and a culture to do that independently.”
Now LendingClub can pursue options to take advantage of its capital position, which should spur a higher return on equity, Sanborn said. Still, he added that growth will be gradual as the company evaluates appropriate capital ratios.
Back in 2018, LendingClub drafted a detailed operating plan for regulators, which didn’t account for the pandemic, rapidly rising inflation or more recent interest rate hikes. The company later had to stay in close dialogue with the OCC to make changes or additions to its plan, seeking permission for major strategic shifts like the launch of new products and the hiring of new executives.
Notably, LendingClub was bound to a tight Tier 1 leverage ratio, which it reported at 12.9% in the fourth quarter of 2023, as well as a constrained common equity Tier 1 ratio. That figure was 17.9% at the end of the fourth quarter.
Now that the agreement has expired, Stephens analyst Vincent Caintic expects LendingClub to have about $400 million in excess capital, which represents more than 40% of its $990 million market capitalization. He said the company should have enough capital to buy back nearly half of its stock, though that’s not a probable outcome.
In the second half of last year, LendingClub introduced a new product called a structured certificate, which has been “a success,” Jefferies analysts wrote in a recent research note. The company can pool loans into a two-tiered private securitization and retain the senior note on its balance sheet, while an institutional investor buys the residual certificate, which can act like financing.
Because the OCC agreement is no longer in effect, LendingClub can ramp up its structured certificate program, which has a 20% to 25% return on equity, according to Caintic.
“[The end of the operating agreement] gives Lending Club more options in how to expand the return on its business,” Caintic said. “I think they’re still going to ease into it, not be too aggressive. They still have regulators, of course, but they can seize more of that growth opportunity and expand both their assets as well as the return on equity of those assets in a faster period of time.”
LendingClub is one of a few fintechs — others are SoFi Technologies and Varo Money — that have a bank charter. The benefits of a charter include a lower cost of funding through deposits.
When LendingClub entered into the OCC agreement in 2021, its bread-and-butter business was selling loans to institutional investors in what it called its lending marketplace.
Sanborn said this week that the company’s objective in buying a bank was to get to a place where it was delivering a strong return from its own balance sheet, and selling loans in the marketplace was “icing on the cake.”
Three years later, LendingClub is starting the “journey” of expanding without the agreement’s constraints, though Sanborn noted that the bank will still operate under its regulator’s purview.
Analysts are optimistic that the operating agreement exit will be a catalyst for growth, and Sanborn said he’s confident LendingClub can manage credit and originations in a way that improves the company’s value.
The FHFA’s Home Loan bank report is that rare thing you never see in the nation’s capital anymore — a balanced plan on a complex issue that could have lasting impact on a difficult problem, writes Joe Neri.
The average rent for an American has increased by 22% and the average home price has climbed by a whopping46% since late 2019. Both the dream of first-time homeownership and the reality of monthly rent are increasingly unattainable for many young families. As the nationwide housing crisis escalates, the inadequacies of today’s Home Loan Bank System — designed during the Great Depression to make home ownership achievable to more Americans — become even more glaring. It’s time for a change.
The FHFA report offers over 50 specific recommendations to address the system’s shortfalls and is worth serious consideration.
But there’s another reason to act on this report: It’s a policy unicorn. It’s that rare thing you never see in the nation’s capital anymore — a balanced plan on a complex issue that could have lasting impact on a difficult problem with broad public support and no impact on federal spending or taxes.
As the CEO ofIFF, one of the firstCommunity Development Financial Institutions to join the Home Loan Bank System in 2010 after Congress opened the doors to us through legislation, I am both a booster and reformer of the system. I know firsthand how the Home Loan banks’ liquidity can get more capital into communities. But I have also seen CDFIs struggle to access liquidity through opaque, inconsistent and unreasonable collateral requirements.
As the chair of the CDFI-FHLB Working Group, I lead a coalition of 35 non-depository Home Loan bank-member CDFIs working for better access to capital for affordable housing and community development projects. We are active shareholding members of the Home Loan banks — with a stake in the system’s success — but also mission-driven financial institutions deeply committed to building thriving and more equitable communities, not simply to maximizing shareholder profits.
The report delineates a clear path for the FHFA, the Home Loan banks and member CDFIs to collaborate, using the system’s tools and resources in service to our nation’s communities. Rather than get stuck on a few hot-button issues, we see an opportunity to build upon the constructive conversations that led up to the report.
First, let’s start with what we all agree is most important and achievable: clarifying the public mission of the Home Loan Bank System and creating clear metrics of accountability.
Without a clear imperative for how the system should meet its mission, all other recommendations are meaningless. The system presently views its primary mission as providing liquidity to its private institutional members. But the FHFA’s report clearly states that this liquidity must be in service to a public purpose like affordable housing and economic development, not simply private speculation likecryptocurrency investments. For the Home Loan Bank System to work for everyone, we must clarify its mission and how to measure it. The old business adage “what gets measured gets done” holds true here.
Second, let’s immediately move forward on a major point of consensus: directing more of the system’s attention and profits toward affordable housing and community development.
Another key recommendation is for the Home Loan banks to voluntarily increase their Affordable Housing Program (AHP) contributions to at least 20% of their prior year’s net earnings, up from the statutorily required minimum of 10%. The FHFA report makes clear that the Federal Home Loan banks retain substantially more earnings and, thus, could easily contribute more for the benefit of communities. That’s the least they can do in exchange for their tax exemption, which allows them to pay hefty dividends to their members. No legislation is needed for this increase, and the Home Loan banks andthe CEOs of our nation’s largest banks have already agreed to an increase to 15%.
Third, let’s work together to realize the system’s public mission, starting with a “mission-oriented collateral” program that treats CDFIs like community financial institutions.
Home Loan banks still struggle to understand and fairly treat CDFIs’ collateral. To address this, the FHFA report recommends the creation of mission-oriented collateral programs, allowing CDFIs to pledge collateral with a strong connection to the system’s public mission. It calls for the banks to expand voluntary and pilot programs, which help increase the production, rehabilitation and preservation of multifamily housing.
Private banks have long understood that CDFIs can more effectively deploy capital to disinvested communities and borrowers. They invest hundreds of millions of dollars into CDFIs to meet their Community Reinvestment Act obligations. Home Loan banks should similarly model their partnership with CDFI members.
We shouldn’t be surprised by the incredible potential of the FHFA’s report. Its review process was thorough and transparent, includingdozens of public roundtables and listening sessions and hundreds of written comments from a range of stakeholders. The report wasn’t assembled in a smoke-filled room in Washington, D.C., but it’s not without controversy. Any full-fledged review of the Home Loan Bank System — a complex, cooperative network of government-sponsored financial institutions — was bound to touch on a few sensitive issues.
Perhaps most sensitive is the FHFA’s consideration of a new rule requiring most Home Loan bank members to maintain at least 10% of their assets in residential mortgages or other mission assets. Today’s banking and mortgage lending have changed so much that enforcing this requirement is trickier than it might seem. But why focus on the report’s more contentious recommendations when others are so readily achievable to create tangible and lasting impact?
The Home Loan bank presidents have an opportunity for action to help real people in real communities, rather than reaction to maintain the status quo through PR consultants and lobbyists. This public review of the system has shown that the status quo is not sustainable. By implementing the most important recommendations in the report, the Federal Home Loan Bank System can once again be a vital instrument in making housing affordable and communities thriving and stable.
The Office of the Comptroller of the Currency Wednesday issued a consent order against Los Angeles-based City National Bank, fining the bank $65 million over risk management issues related to third-party vendors, operational risk and other concerns.
Bloomberg News
WASHINGTON — The Office of the Comptroller of the Currency Wednesday fined the Los Angeles-based City National Bank $65 million after it found that the firm had systemic deficiencies in its risk management practices and engaged in unsafe or unsound practices.
The OCC — the primary supervisor for nationally chartered banks — issued a consent order Wednesday against the $93 billion-of-assets bank over concerns about its management of third-party risks, lack of robust internal controls, deficiencies in operational risk event reporting, and shortcomings in fraud risk management. While the bank did not confirm or deny the allegations, CNB agreed to take remedial actions to avoid further enforcement actions from its regulator.
“The OCC expressly reserves its right to assess civil money penalties or take other enforcement actions if the OCC determines that the Bank has continued, or failed to correct, the practices and/or violations,” the consent order states. “These actions could include additional requirements and restrictions, such as: (a) requirements that the Bank make or increase investments, acquire or hold additional capital or liquidity, or simplify or reduce its operations; or (b) restrictions on the Bank’s growth, business activities, or payment of dividends.”
The OCC notice announcing the penalty notes CNB’s Board of Directors consented to the issuance of the consent order and has undertaken corrective actions and committed to addressing the identified deficiencies “in the interest of cooperation and to avoid additional costs associated with administrative and judicial proceedings.”
Diana Rodriguez, Chief Communications Officer at City National Bank reiterated in an email the firm’s ongoing work to strengthen the bank’s financial and regulatory standing.
“City National, and our new executive management team, are committed to resolving the matters identified in the OCC’s order as quickly as possible,” she wrote. “Our focus will continue to be on both strengthening our infrastructure and systems to reflect a bank of our size and business model, while at the same time providing our clients with consistently outstanding banking products and services.”
City National, renowned for its focus on wealth management and boasting high profile clientele in the city of angels, is a subsidiary of the Royal Bank of Canada since RBC bought it in 2015 for $5.4 Billion.
The order also comes on the heels of a challenging 2023 for CNB. In January 2023, City National entered into a consent order with the Justice Department that included a fine of $31 million over allegations that it failed to offer home loans to Black and Hispanic borrowers in Los Angeles County from 2017 to 2020. The order marked the largest redlining settlement in DOJ history.
CNB also reported a $38 million loss — driven by rising deposit costs — in the second quarter, a steep decline compared to its profitable $102 million net income in the same period in 2022. The turmoil resulted in RBC replacing CNB’s top leadership, installing Greg Carmichael as the banks’ executive chair.
The bank also reportedly had one of the highest levels of average unrealized securities losses among U.S. banks of comparable size. RBC later took steps to address unrealized losses at CNB and injected capital into City National to fortify its financial position and repay higher-cost borrowings. Despite the efforts to right the ship, CNB recorded a whopping $247 million loss during the fourth quarter 2023 that ultimately led to more turnover in senior leadership. Industry veteran Howard Hammond replaced Kelly Coffey as CEO in November.
When one child misbehaves, even innocent siblings can expect extra scrutiny when their parents come home.
“It doesn’t matter if you’re the problem child,” said Jason Henrichs, founder and CEO of community bank consortium Alloy Labs Alliance. “You’re all in trouble.”
The same could be said of players in the banking-as-a-service space. Financial institutions including Blue Ridge Bankshares, Cross River Bank and First Northwest Bancorp have been forced by regulators including the Office of the Comptroller of Currency and the Federal Deposit Insurance Corp. to heighten oversight of their fintech partners, strengthen compliance and more in recent years; in fact, on January 26, the OCC hit Blue Ridge with a second consent order, while the FDIC published consent orders related to fintech partnerships formed by First & Peoples Bank and Trust Company and Choice Financial Group. A recent analysis by S&P Global Market Intelligence found that banks that provide BaaS to fintech partners accounted for 13.5% of severe enforcement actions issued by federal bank regulators in 2023, a disproportionately large number considering how few banks in the U.S. engage in BaaS, the analysis said.
A fintech or other company tied to a bank experiencing regulatory crackdown may be limited in the products it can launch or modify, or face increased scrutiny from new banking partners if they wish to jump ship.
Even entities that have not run into trouble — whether they are brands seeking chartered banks to support their programs, the sponsor banks amassing these companies as clients or the middleware providers that connect the two — may experience ripple effects in the banking-as-a-service space.
The explosion of banking-as-service programs happened at a time “when the CFPB was relatively silent and there was a period of regulatory uncertainty and a relatively hands-off approach,” said Henrichs. “A number of things were done that today would have been cut off quickly,” including claims regarding FDIC insurance and latitude for programs to conduct their own oversight.
This is causing a shift in how fintechs view their banking-as-a-service relationships and how they should position themselves moving forward.
“As recently as two years ago, it was common practice to figure out the path of least resistance for a fintech-bank sponsor relationship,” said Clayton Mitchell, principal at consulting firm Crowe. “That mindset has changed over the last 18 to 24 months. Fintechs are looking for business partners who are in banking-as-a-service genuinely and strategically. That means the due diligence is likely harder.”
One option that may be more appealing to fintechs is redundancy, or taking on more than one sponsor bank.
“We’re working with a couple of very large fintechs that are explicit in thinking about whether they have the right relationships or need to diversify more,” said Adam Shapiro, a partner at Klaros Group.
He said this urge is driven less by fear that the main partner bank will shut down and more by the desire to preserve flexibility in case new initiatives come under review. He has also observed a growing recognition that different partner banks may specialize in different areas, such as deposits, credit, lending or international payments.
“It’s common for enforcement actions to have either prohibitions on new activity for a period or a requirement for regulatory permission to be granted,” said Shapiro. “If you’re a fintech you want a backup plan.”
Stash, a banking and investing app, relies on Stride Bank in Enid, Oklahoma, as its single BaaS partner.
“Stash Core was built to support multiple banking partners,” said Liza Landsman, CEO of Stash, via email. “Right now, we are only utilizing one partner, but the capability exists for the future as we continue to grow and serve our customers in new ways.”
Moving to another bank is not easy.
“Diversification in terms of sponsors is a logical pathway that a lot [of fintechs] will go to,” said Curt Queyrouze, president of Coastal Community Bank in Everett, Washington. Yet fintechs typically sign three- to five-year contracts with their sponsor banks and it takes time to launch or wind down a relationship. Issuing new routing and account numbers and new cards also causes friction for customers.
“With all the pressures, it’s hard to move,” said Queyrouze.
Coastal Community, which has $3.7 billion of assets, saw a spike in inbound requests in the middle of 2023, as some banks pulled back from this business model.
However, “we’ve slowed the new partners both purposefully and also in response to environmental factors,” including because of regulatory scrutiny, said Queyrouze.
If a company with an existing bank relationship approaches the Warsaw, New York-based Five Star Bank, “we need a pretty convincing story on why they want to leave that bank,” said Abraham Rojo, its head of digital banking and BaaS.
Companies seeking new sponsor banks can take other actions to put themselves in a better position.
“You’re seeing a race to prove out your unit economics in that this is a good and fundable business,” with less emphasis on the number of customers and more on the number of customers that make money for the company, said Henrichs.
Moreover, “There is a shift in the boardroom,” he said. “Previously investors who were [seeking] growth at all costs are now realizing that risk and compliance is not an expense center, but the lifeblood of a company to have freedom to operate.”
Queyrouze echoes these sentiments.
“Be serious about approaches to compliance, particularly about transparency and promises made and promises kept,” he said. “Think about that as a priority. Let us know things about your financial standing, run rates, objectives. The days of having a fintech with a capital focus toward customer acquisition have passed for the time being, and it’s more about unit costing and operating controls and cash flow.”
Rojo, of the $6 billion-asset Five Star, also analyzes leadership.
“We look for their ability to sustain the business,” said Rojo. “I look at their leadership and what they are trying to do, especially how they are differentiating themselves in the market. Who are their backers? Are they well funded? Do they have the background to execute something like this?”
Shapiro advises fintechs and other brands using sponsor banks to watch the regulatory environment carefully and read enforcement actions to see where their bank’s vulnerabilities lie.
“If there is something you see that your bank is not asking you for that regulators are concerned about, do it yourself,” he said, such as providing fair lending data. “Put a report on your file about what they should be asking for.”
Fintechs may also want to revisit their relationships with middleware providers. Synapse, for instance, laid off nearly half its staff in October after one of its partner banks, Evolve Bank & Trust, and a large fintech client both broke ties with Synapse and decided to work together directly.
“The value is as enablers. When they start acting as gatekeepers, that provides negative value,” said Shapiro.
He suggests that fintechs evaluate the benefits of these providers’ technology and operational support but pursue a direct contract with a bank around its banking services.
Fintechs or other companies that embed financial services can view a sponsor bank’s troubles in two lights.
“Either the fintech company should be considering another bank, who may face similar challenges, or more likely, [recognize] that any enforcement action will provide the needed guidance and strengthen the bank’s compliance system and programs overall,” said Phil Goldfeder, CEO of the American Fintech Council, which counts BaaS-oriented banks among its members.
Even one that came under scrutiny itself can spin the experience into something positive.
“If a fintech was examined by regulators and successfully responded to that, we consider that a good thing because they did the homework, showed their commitment and invested in that business rather than winding down,” said Rojo.
“I haven’t seen fintechs that have their act together on risk and compliance, and have business that appears desirable, have difficulty getting new relationships,” said Shapiro.
He even sees new banks quietly enter the market in search of fintech relationships.
“They’re not out at conferences directly marketing [their services] but they’re lurking in the background and looking for people that meet a risk-reward profile,” said Shapiro.
Experts are criticizing a proposal from the Consumer Financial Protection Bureau to cut overdraft fees for the largest banks but not smaller banks as ignoring the firms that rely disproportionately on overdraft fee income.
Bloomberg News
A plan by the Consumer Financial Protection Bureau to slash overdraft fees comes with a major omission: Small banks, which are more reliant on overdraft revenue as a profit center than larger banks. Several dozen small institutions are among the worst offenders in targeting consumers for overdraft charges, experts say.
The CFPB’s proposal released last week would allow large financial institutions with more than $10 billion in assets to charge a breakeven fee or a maximum overdraft fee of between $3 to $14, under a rubric to be set by the bureau. If banks charge a higher amount than their costs, the CFPB will consider an overdraft charge to be a line of credit subject to the Truth in Lending Act, which requires disclosures of annual interest rates.
“Exempting banks and credit unions that have under $10 billion in assets is a mistake because the bureau’s rule doesn’t touch some of the biggest offenders,” said Aaron Klein, a senior fellow at the Brookings Institution and a former deputy assistant secretary for economic policy in the Treasury Department. “If overdraft is a profit center, then it’s an extension of credit — and credit is regulated.”
Some small banks continue to reorder transactions from high to low amounts, which can maximize fees, said Klein, citing his own research that found small banks and credit unions “are some of the biggest overdraft predators.”
The 211-page proposed rule would apply only to 175 large banks and credit unions. The CFPB also said it plans “to monitor the market’s response” and determine whether “to alter the regulatory framework,” for smaller institutions with less than $10 billion in assets.
“I see no way for small banks not to be affected by this,” said Kristen Larson, an attorney at Ballard Spahr. “They’re regulating the larger banks, but the smaller ones lose leverage because of the regulation.”
The CFPB may have exempted small banks in an effort to avoid convening a small business review panel, which is required for rules impacting small businesses, but would have delayed the proposal’s release. Community banks and credit unions also could exert their political muscle in opposing a final rule if they were not exempted.
“This is very much a part of the Biden administration’s campaign, and they needed to get this out so they can say they are trying to tackle prices, however misguided that might be,” said Nicholas Anthony, a policy analyst at the Cato Institute.
The flip side is that the CFPB may have to persuade a court that a final overdraft rule is not “arbitrary and capricious,” which may be a harder lift if the bureau treats overdraft fees as finance charges when assessed by larger financial institutions but not by smaller ones.
Rob Nichols, president and CEO of the American Bankers Association, said the CFPB has no legal authority to impose what he called a “price cap” on overdraft charges. Lindsay Johnson, president and CEO of the Consumer Bankers Association, called the CFPB’s proposal “price setting” and claimed changes to overdraft services would impact whether banks could offer free checking accounts.
The CFPB delved into the history of overdraft fees that began as a courtesy service to cover bounced checks in the 1980s. When financial institutions began extending overdraft services to debit card transactions, the volume of overdraft fees skyrocketed and the fee revenue began to influence banks’ business models.
Overdraft fees accounted for $10 billion in revenue in 2004, but skyrocketed to an estimated $25 billion by 2009, according to research by the Center for Responsible Lending. By 2019, under pressure from the CFPB, overdraft fee revenue had dropped to an estimated $12.6 billion.
CFPB Director Rohit Chopra has repeatedly complained that the Federal Reserve Board used its authority — and did not rely on an interpretation of statute — to carve out an exception for overdraft charges from Regulation Z, which implements the Truth in Lending Act.
“The question now is, if you’re under $10 billion, why does any bank get an exemption from TILA?” asked Joe Lynyak, a partner at Dorsey & Whitney.
The CFPB’s past research found that overdraft presents a serious risk to low-income consumers with roughly 9% of consumer accounts paying 10 or more overdrafts a year, accounting for close to 80% of all overdraft revenue.
“Overdraft disproportionately targets lower-income minorities, stripping wealth — and it has been tremendously profitable for banks,” said Klein, who cited some small banks that specifically target military personnel for overdraft charges and suggested regulators need to discourage such abuse. “Little banks and credit unions punch far above their weight in overdraft.”
Another wrinkle is that not all of the 175 large banks and credit unions that would be covered by the proposed rule have reduced overdraft fees. When Bank of America cut overdraft fees from $35 to $10 in 2022, other large and mid-sized banks followed. But many did not.
“There may be an interesting industry split between banks that have already eliminated overdraft and those that are still reliant or using it as part of their business model,” said Anthony at Cato.
JPMorgan Chase and Wells Fargo accounted for roughly one-third of overdraft revenue reported by banks over $1 billion, according to the CFPB. Still, larger banks may have more leeway to replace overdraft fees with monthly fees, or by scaling back free checking account offerings.
Larson said the CFPB has left the door open for future expansion of the rule to smaller institutions.
“The fees will be really transparent, and then smaller institutions are going to be forced to make modifications or risk losing customers over this,” she said. “In a competitive landscape, why would a consumer pay $24 or $35 for the same service? If smaller banks don’t start following what these larger providers are doing, they’re going to lose customers.”
Larson is urging small banks to submit comments on the proposal by the April 1, 2024 deadline because of “the downstream impact to competition in the marketplace,” she said.
A final rule on overdraft fees is expected to go into effect in October 2025.
Rohit Chopra, director of the Consumer Financial Protection Bureau, said that the agency’s overdraft proposal “would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft,” adding that overdraft lending “is one of the only types of consumer loans where consumers are not told an APR or given lending disclosures.”
Bloomberg News
The Consumer Financial Protection Bureau plans to dramatically slash overdraft fees at the largest banks by classifying overdraft services as extensions of credit and allowing financial institutions to recoup their costs or agree to charge a maximum fee of $14 under a benchmark set by the government.
Under a proposal to be released Wednesday, the CFPB plans to radically change how overdraft fees are calculated and charged by financial institutions that have more than $10 billion in assets. Banks and credit unions with less than $10 billion in assets would be exempt from the proposed rule.
Two years after many large banks eliminated or dropped overdraft and nonsufficient fund fees, the CFPB wants overdraft services to be classified as an extension of credit, subject to the same consumer protections as credit cards under the Truth in Lending Act that requires disclosures of annual percentage rates.
CFPB Director Rohit Chopra said that what began more than a half-century ago with banks offering overdraft services as a convenience to customers when bills were paid with paper checks has morphed into what he called “a junk fee harvesting machine.” The advent of debit cards changed the calculus with banks collecting $12.6 billion in overdraft fee revenue in 2019. The CFPB has estimated that recent policy changes by some banks have lowered overdraft revenue to about $9 billion a year.
“We’re proposing a rule that would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft,” Chopra said Tuesday on a conference call with reporters. “Right now, overdraft lending is one of the only types of consumer loans where consumers are not told an APR or given lending disclosures.”
A key aspect of the proposal is that the CFPB would set a benchmark fee of either $3, $6, $7 or $14 that would not require the financial institution to calculate their own costs and losses for providing overdraft services. The bureau calculated how much it would cost to cover costs and losses based on data collected from various financial institutions, and proposed those four benchmark amounts. The CFPB is seeking comment on which of those benchmarks is appropriate, senior CFPB officials said on the call with reporters.
Under the proposal, large financial institutions would have the choice of either offering customers overdraft services as a courtesy and charging the benchmark amount set by the bureau, or charging a fee in line with their costs. Alternatively, banks could also provide overdraft as a line of credit to customers, though doing so would require compliance with TILA, including disclosing an applicable interest rate for overdraft services. The pricing for overdraft services translates to an annual percentage rate of roughly 16,000%, Chopra said.
Because the largest financial institutions cover roughly 80% of consumers, the bureau exempted smaller banks and credit unions. As a result, it did not have to convene a small business review panel, which is typically required for major rules that would impact small institutions.
The CFPB is seeking public comment by April 1. A final rule is expected in October, though an overdraft rule would not go into effect until Oct. 1, 2025, due to TILA requirements.
Chopra has repeatedly blamed the Federal Reserve Board for giving banks an exemption from the Truth in Lending Act’s disclosure requirements that allowed overdraft to become what he called a “profit driver.” Technically, the CFPB plans to propose eliminating an exemption for overdraft services from complying with the Truth in Lending Act.
Chopra said consumers have paid an estimated $280 billion in overdraft fees in the past two decades. In 2022 alone, Wells Fargo and JPMorgan Chase accounted for one- third of all overdraft revenue, the CFPB said.
Lael Brainard, director of the National Economic Council and a former vice chair of the Federal Reserve, joined Chopra from the White House on a call with reporters and said the CFPB’s overdraft proposal was part of President Biden’s efforts to eliminate hidden fees generally for all Americans.
“We’re calling on all corporations that are benefitting from yields and supply chains and lower input costs, to pass those savings along to consumers,” Brainard said.
Under Chopra, the CFPB has announced a slew of enforcement actions and settlements with banks. Wells Fargo had to return $205 million, Regions Bank $141 million, and Atlantic Union $5 million in fees to consumers that the CFPB said were unlawful. Chopra cited on the call with reporters the deceptive overdraft practices of TCF Financial, which was acquired by Huntington Bancshares in 2020.
The Trump administration opened the door to rewriting overdraft rules in 2019. Chopra first announced a crackdown in 2021, then issued guidance in late 2022 that found practices that the agency considered unfair to consumers. Last year, the Office of the Comptroller of the Currencyand Federal Deposit Insurance Corp. also took aim at certain practices such as “authorized positive, settle negative,” that may be deceptive because transactions get approved when a consumer’s account balance is positive, but later post to the account when the available balance is negative, incurring fees.
Authority for regulating overdraft fees was transferred from the Fed to the CFPB in the 2010 Dodd-Frank Act.
As the scale of financial crimes grows around the world, banks and financial institutions see a tidal wave of fraud, money laundering and trafficking proceeds sloshing through the global economy, with better coordination needed within and between national governments to dam it, a new report by Nasdaq and the financial consulting firm Oliver Wyman found.
The numbers tell a stark story. Illicit money flows totalled $3.1 trillion globally in 2023, including $800 billion in drug trafficking proceeds, $350 billion from human trafficking, and $11 billion in terrorist financing. That total doesn’t include fraud, which cost almost half a trillion dollars last year, including close to $450 billion from payments, check and credit card fraud and more than $40 billion in scams targeting individuals and companies, the report found. But that’s just the fraud that authorities know about.
“You have to assume it’s more,” said Adena Friedman, CEO of Nasdaq, which bought Verafin, an anti-financial-crime cloud software company, in 2020. A surprising finding, she said, was “the sheer amount of money that is moved through the banking system for nefarious purposes.”
Check fraud and scams were among the most prevalent fraud issues for banks last year, said Mike Timoney, vice president of payments improvement at the Federal Reserve. People are writing fewer checks, but checks still are the least secure payment type, he said, noting that Fincen found that check fraud doubled between 2021 and 2022 and that 63% of participants said their organizations were dealing with check fraud in the Association for Financial Professionals’ Payments Fraud and Control Survey.
Banks are also scrambling to keep ahead of scamsters, he said, with the amount of money lost to scams growing even as the number of reported scams fell between 2021 and 2022, according to Federal Trade Commission data. One issue: “The industry lacks a consistent way to define and classify scams, making it difficult to identify current tactics for this type of fraud,” Timoney said. “The Federal Reserve is leading an industry work group that released a recommended definition of scams in fall 2023 and is focused on creating a scam classification structure to promote consistent scam reporting, trend measurement and analysis.”
Surveyed about what they considered the biggest threats, anti-financial-crime officials at 200 financial institutions said they were most worried about faster and instant payments (52%), money mules (47%), terrorist financing (33%) and drug trafficking (33%).
As more banks move to instant payments, including the Fed’s new FedNow system, guarding against payments fraud has become a major issue for banks. “I think [FedNow] is an important solution for the financial industry, but on the other hand, time is your friend a little bit when it comes to anti-fin crime, because by the delay in someone coming in or someone wanting to wire money or doing an ACH transaction and the time it takes to process that it enables the banks to do a lot of background checks and to do a lot of work ahead of the transaction actually occurring on issues of anti-fraud or crime,” Friedman said.
Without a payment delay, banks have to speed up their anti-fraud measures by checking customers’ bona fides rapidly, which requires faster processing, to avoid paying the wrong party.
“Since the pandemic, a new global phenomenon has emerged: human trafficking scam centers,” Mitchell said. “In these centers, criminal organizations force trafficked victims to commit financial scams against innocent people.”
Such operations — combining organized crime, trafficking and fraud — are just one example of how financial institutions need to work together, as well as with government agencies, to catch up to criminal enterprises, he said.
“There is much to do in the coming years to modernize our information sharing, enhance support for law enforcement with better data and intelligence, and leverage the best of financial services to protect victims and secure our financial system’s integrity,” Mitchell said.
The data-sharing aspect appeared on survey participants’ wishlist as well, with 68% saying they would like regulations to allow peer institutions to share more data and 49% asking for better collaboration and information-sharing with law enforcement and regulatory agencies.
Getting regulators, law enforcement and financial institutions to share information in a timely way is one of the main obstacles to fighting fraud and financial crime, said Daniel Tannebaum, a contributor to the report. When banks file suspicious activity reports to regulators, they often don’t receive feedback on whether the report led to catching a criminal — and if they do hear back from the agency, it’s often not until much later, he said.
“That type of feedback is critical to refine your financial intelligence unit so you identify what they really should be focused on,” said Tannebaum, a partner at Oliver Wyman and former Treasury and New York Federal Reserve Bank official. Without this feedback, banks can’t train their fraud-spotting systems to find problematic behavior patterns, or to screen out patterns that look dangerous but are actually harmless.
With regulators’ permission, banks can use these signals as part of AI training, which 58% of survey participants said they have plans to do, and Friedman said that’s an opportunity for financial institutions.
“I think that gen AI is going to help us get a lot smarter and a lot better at really kind of finding real criminals but also making sure we don’t have a lot of false positives,” she said.
Rep. Blaine Luetkemeyer, R-Mo., announced Wednesday that he will be retiring from Congress after his current term. Luetkemeyer had been seen as a frontrunner to serve as top Republican on the House Financial Services Committee after committee chairman Patrick McHenry, R-N.C., announced his retirement last month.
Bloomberg News
WASHINGTON — Rep. Blaine Luetkemeyer, the longtime Republican from Missouri and senior member of the House Financial Services Committee, will not seek reelection in 2024, his office said.
Luetkemeyer had established himself as one of the committee’s most influential voices. He currently chairs the panel’s subcommittee on national security, and before his time in Washington, worked as a state banking examiner and community banker. He was first elected in 2009, and will retire when his term ends in January 2025.
“It has been an honor to serve the great people of the Third Congressional District and State of Missouri these past several years,” Luetkemeyer said in a statement. “However, after a lot of thoughtful discussion with my family, I have decided to not file for re-election and retire at the end of my term in December. Over the coming months, as I finish up my last term, I look forward to continuing to work with all my constituents on their myriad of issues as well as work on the many difficult and serious problems confronting our great country. There is still a lot to do.”
Luetkemeyer is the second senior Republican on the House Financial Services Committee to announce that he will not seek reelection in the upcoming races.
The panel’s current chairman, Rep. Patrick McHenry of North Carolina, has also said he will retire from Congress at the end of the year, leaving open the top Republican spots on the committee. Before announcing his departure, Luetkemeyer was considered a frontrunner to take over for McHenry as the top Republican on the committee, and had previously expressed interest in the position.
His departure leaves Reps. Andy Barr of Kentucky, French Hill of Arkansas and Bill Huizenga of Michigan as the most likely frontrunners to serve as the top Republican on the committee in the next Congress. Of those candidates, Hill is the most senior member and led the committee on an interim basis when McHenry was interim speaker last year.
Luetkemeyer had staked out severalsignaturebanking issues in his time on the committee, but none more so than a crusade against the Financial Accounting Standards Board’s CECL, or “current expected credit loss” standard. Prior to Congress’ most recent recess, Luetkemeyer introduced a bill that would increase rulemaking guidelines for FASB and require it to report annually to Congress.
Luetkemeyer was also one of the loudest voices criticizing “Operation Chokepoint,” and in hearings, has frequently complained that Biden administration banking officials have inserted politics into the industry.
His departure is not likely to lose Republicans a seat. His district, representing central Missouri and some St. Louis suburbs, is considered safely Republican.
Sen. Joe Manchin, a Democrat from West Virginia, and Sen. John Moran, a Republican from Kansas, reintroduced the Fair Audits and Inspections for Regulators (FAIR) Exams Act this month in an effort to enhance transparency of bank examinations.
Anna Rose Layden/Bloomberg
Banking-as-a-service institutions are applauding legislators’ calls for fairer exams and increased transparency from federal financial regulators.
Last week, the American Fintech Council, which represents BaaS banks, supported the introduction of the Fair Audits and Inspections for Regulators (FAIR) Exams Act by Sens. John Moran, a Republican from Kansas., and Joe Manchin, a Democrat from West Virginia.
David Patti, director of communications and government relations at Customers Bank, said financial institutions would prefer to be told what the exact expectations are, instead of guessing until they get it wrong. Brian Graham, a co-founder and partner at Klaros Group, said regulators haven’t issued many clear-cut rules for BaaS, and the process for challenging those agencies can be precarious.
“There’s a legitimate point to be made that much more of the public policy around banking is happening outside of the law and regulation process, and [instead] in the supervisory process, which can both feel more arbitrary and unfair and sometimes can be arbitrary and unfair,” Graham said.
Phil Goldfeder, CEO of the American Fintech Council, said in a prepared statement in response to the proposed legislation that, “innovative banks are rightfully held to the highest standard of transparency, compliance and responsibility,” but added that regulators should meet the same bar.
Banking-as-a-service [BaaS], when fintechs and banks partner to deliver services, has been high on regulators’ radars in the last couple of years. In June, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation issued guidance for how banks can assess and monitor third-party relationships, but bankers and trade groups said the report still wasn’t specific enough.
Patti said that Customers, a player in the BaaS space, is in constant communication with its regulators to make policy decisions for the bank to follow. But if regulators make individual decisions with each financial institution, it’s hard to know if each bank is treated consistently, he said.
“In the absence of bright lines, it depends on relationships [with regulators],” Patti said. “So there’s probably not much transparency….it’s not transparent and not public.”
BaaS sponsor banks, which bear the brunt of the regulatory burden in these relationships, have also relied on other banks’ mistakes as blueprints for what not to do due to a lack of formal rules, Graham said. Blue Ridge Bank, Cross River Bank and First Fed Bank have each been hit with enforcement actions regarding their BaaS practices in the last year and a half.
These regulatory decisions can also seem ad hoc or idiosyncratic, Graham said, as determinations are made based on internal assessments, instead of publicly available information.
“Right now, BaaS activities are a significant area of focus for the regulators, fair or unfair,” Graham said. “It does appear that much of what the regulators want to achieve in the space — from a policy point of view or risk management point of view or compliance point of view — is being done through enforcement actions.”
Patti said that Customers has a good relationship with its overseers, but he thinks an independent examination review protocol would increase visibility of policies.
The full text of the Fair Exams Act hasn’t been published, but other aspects of the bill include requiring agencies to issue timely responses to bankers during exams and creating an independent examination review director within the Federal Financial Institutions Examinations Council to inspect exams upon banks’ requests. The American Bankers Association and Independent Community Bankers of America also supported the proposal in written statements.
The FDIC, Fed and OCC each have ombudsman offices designed for banks to appeal or question regulatory decisions without fear of retaliation. Graham said, however, that banks he’s spoken to don’t see these units as a practical option, since the process is still under the regulators’ umbrella.
The Fed and FDIC declined to comment. The OCC did not respond to a request for comment.
Neither Graham nor Patti think the FAIR Exams Act will pass. But similar to how regulators can use actions to make policy, Patti thinks it’s possible a recent case heard by the U.S. Supreme Court could lead to more “neutral” enforcement and appeals processes. In Securities and Exchange Commission v. Jarkesy, a hedge-fund founder challenged the constitutionality of the agency’s administrative enforcement proceedings. The case could have implications for banking regulators too, potentially requiring court involvement in enforcement actions.
The court hasn’t yet issued a decision on the case, but justices expressed skepticism in comments about the use of in-house judges.
Thirteen years is a long time to wait for rules implementing open banking in the U.S. We should wait a little longer and get it right, writes Tom Brown.
nito – stock.adobe.com
In July 2010, Congress tucked a small provision into the Dodd-Frank Financial Reform Act, imposing a new mandate on firms that provide financial services to consumers. The mandate requires financial institutions to provide consumers electronic access to their banking account data. The law, called “Section 1033” of the mammoth bill, also gave the newly created Consumer Financial Protection Bureau the authority to issue a rule implementing that mandate. More than thirteen years later,the CFPB finally released its proposed rule.
The proposed ruleoffers a solid foundation, yetits impact is limited. The original statute’s wording is expansive, requiring all consumer financial services firms to provide consumers with access to their data, except those explicitly exempted. However, the recent draft of the rule is restricted in scope, applying only to credit cards, checking accounts and digital wallets. To truly align with the statute’s broad intent, the CFPB should consider broadening the rule’s reach, including entities like payroll providers, Electronic Benefits Transfer accounts and billing companies. Greater data coverage would benefit more consumers and fulfill Congress’ original objectives.
Section 1033 of the Dodd-Frank Act received little attention when President Obama signed it into law along with the rest of the sweeping bill. The creation of the CFPB, the imposition of caps on debit interchange for large banks and the remaking of the mortgage industry overshadowed it. Comprehensive summaries of Dodd-Frank from major law firms and even Senate Democrats did not mention it. How the language even made it into law was mysterious. The consumer fintech industry, as it exists today, did not then exist. Products on which hundreds of millions of people now rely, including Venmo, Square Cash, Propel, Earnin and Chime, had yet to launch.
Yet, Section 1033 was as far-reaching as anything else in the bill. By 2010, it was clear that technology could eliminate tedious data entry and reconciliation for the banking public. Intuit had acquired Mint, an early fintech pioneer, and had begun enabling consumers and small businesses to track transactions automatically. Consumers and small businesses that provided Intuit with account credentials for banking and wealth management accounts could reconcile their bank accounts and calculate their tax obligations without manually entering transaction details.
Thirteen years after the passage of Section 1033, American consumers deserve more than the ability to delegate access to electronic data related to their deposit accounts, credit cards and electronic wallets. The market has already delivered those benefits.
Consumers have clearly benefited from giving third parties access to their account information, making it easier to switch account relationships. Even those who don’t switch benefit from new services that guard against overdrafts and other bank-imposed charges. This trend has led to notable declines in overdraft revenues as the impacts of open banking gain popularity. Moreover, since checking accounts reflect a person’s financial health, real-time transaction and balance information can aid lenders in responsibly extending credit to those who can afford it while avoiding burdening those nearing financial distress.
The consumer demand landscape is evolving, with a growing interest in granting innovators access to a broader range of financial data, including payroll data, EBT and bill payment information. Like data from checking accounts and credit cards, access to these new data points can enhance competition, reduce unnecessary fees and widen financial service access, including credit.
The CFPB plays a crucial role here. Market dynamics that influenced traditional financial service providers might not similarly impact payroll companies, EBT processors or billers, primarily because consumers often don’t get to choose these service providers. Unlike consumers’ free market leverage in choosing banks or credit card companies based on data access, this influence doesn’t extend to payroll and EBT services, underscoring the need for clear regulatory guidance.
Thirteen years is a long time to wait for anything. Urging the CFPB to expand its current proposal could further prolong this period. Fortunately, the language of the statute largely solves that problem. It is self-executing. In the absence of a new CFPB rule, the law mandates that all financial institutions under the umbrella of the Dodd-Frank Act provide electronic data access to consumers and their agents. On this dimension, no rule is preferable to a limited one. Having waited this long, we can afford to wait a bit more to include meaningfully more consumer data.
Senate Banking Committee Chairman Sherrod Brown, D-Ohio, was flanked to his left by ranking member Sen. Tim Scott, R-S.C., and to his right by Sen. Jack Reed, D-R.I., during a Dec. 6 hearing, which featured testimony by the CEOs of the biggest U.S. banks.
Ting Shen/Bloomberg
Senate Banking Committee Chairman Sherrod Brown is pressuring the nation’s four largest banks to make use of a federal database to determine whether their retail customers qualify for benefits under a law offering financial protections to active-duty service members.
That 20-year-old federal law caps the interest rates on loans made prior to military service at 6%, as long as the service member is on active duty.
Brown noted that lenders have the ability to run free checks of a Department of Defense database to determine whether customers are currently on active duty.
“Active duty servicemembers have much on their mind, from deployment, to concerns about leaving their families, to returning home,” Brown wrote. “Banks should not place the burden on servicemembers to request protections they are legally entitled to receive.”
Brown pointed to a December 2022 report by the Consumer Financial Protection Bureau, which found that fewer than 10% of auto loans taken out by Reserve and National Guard members who were on active duty got interest rate reductions.
The CFPB calculated that Reserve and Guard members who are on active duty pay about $9 million per year in interest that they are not legally required to pay.
Under the Servicemembers Civil Relief Act, service members may qualify for interest rate reductions by providing creditors with written notice of their active-duty status.
Brown’s letters followed a Senate Banking Committee hearing last week where he pressed the CEOs of the country’s biggest banks on whether their companies proactively check the database.
During the hearing, JPMorgan Chase CEO Jamie Dimon said he’s sure that his bank complies with the law. He also touted JPMorgan’s record of hiring military veterans and spouses.
Citigroup CEO Jane Fraser also pointed to her company’s record of employing veterans, before adding: “We make extensive investments in ensuring that we comply with the laws, and we do indeed tap into the database.”
Bank of America CEO Brian Moynihan said that the Charlotte, North Carolina-based bank follows the provisions of the Servicemembers Civil Relief Act. After receiving notification about service members’ active-duty status, BofA sends $180 million back to them annually, he said.
In written testimony, Wells Fargo CEO Charlie Scharf said that the San Francisco-based bank is committed to providing the benefits and protections required by the 2003 law.
