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Potential Impact of Executive Orders on Community Banks

In what was has been a busy first week for the new administration with the release of numerous Executive Orders (EOs) from the White House, several EOs have a direct or indirect impact on community banks. The following is a highlight of several orders and their anticipated or potential impact. 

One of the most significant EOs to the industry is titled, Regulatory Freeze Pending Review, whereby government agencies may not propose or issue any rule, including sending it to the Office of the Federal Register (OFR), until a department or agency head reviews and approves the rule. The Director or Acting Director of the Office of Management and Budget (OMB) has the ability to exempt any rule from the EO deemed necessary to address emergency or other urgent situations. Rules which had been sent to OFR but not yet published are to be withdrawn for review and approval.  

Additionally, the agencies are to consider postponing for 60 days the effective date of any rule that had been published in the Federal Register but had not yet taken effect for the purpose of reviewing any questions of fact, law, and policy that the rules may raise. During the 60-day period, where appropriate and consistent with applicable law, the agencies are to consider opening a comment period to allow interested parties to provide comments about issues of fact, law, and policy raised by the rules postponed, and consider reevaluating pending petitions involving such rules. The 60-day period may be extended, where appropriate and consistent with applicable law. Use of the word “rule” within the EO includes guidance, advanced notice of proposed rulemaking, notices, proposed and final rules. A pause on regulation is common when administrations change.  

Equally significant are EOs which Designate Chairmen and Acting Chairmen, Acting Cabinet and Cabinet Level Positions, Sub-Cabinet Appointments, and Cabinet and Cabinet-Level Appointments. Through the series of these orders, key leadership designations and appointments for agencies have been made allowing affected industries to begin anticipating the interests, priorities, and perspectives of agency and department heads. Designations and nominations include: 

  • Travis Hill, Acting Chairperson of the Board of Directors of Federal Deposit Insurance Corporation 
  • Andrew Ferguson, Chair of Federal Trade Commission 
  • Mark Uyeda, Acting Chair of Securities and Exchange Commission 
  • Jeffrey Hall, Chair of Farm Credit Administration Board, Farm Credit Administration   
  • David Lebryk to act as Secretary of Treasury, Scott Bessent nominated as Secretary of Treasury  
  • Gary Washington to act as Secretary of Agriculture, Brooke Rollins nominated as Secretary of Agriculture 
  • Everett Woodel to act as Administrator of Small Business Administration, Kelly Loeffler nominated as Administrator of Small Business Administration 
  • Matthew Ammon to act as Secretary of Housing and Urban Development, Eric Turner nominated as Secretary of Housing and Urban Development 
  • Ingrid Kolb to act as Secretary of Energy, Christopher Wright nominated as Secretary of Energy 
  • Matthew Vaeth to act as Director of OMB, Russell Vought nominated as Director of OMB 

Wisconsin is represented in the nomination of persons serving on a national level with Sean Duffy having been nominated as Secretary of Transportation.  

 In an EO titled, Initial Rescission of Harmful EOs and Actions, seventy-eight EOs from the previous administration stretching from 2021 to last week were rescinded. Within the list rescinded was EO 14030 from May 2021 regarding Climate-Related Financial Risk. In the 2021 order, financial institutions were criticized for the “failure…to appropriately and adequately account for and measure…” the impact of extreme weather risk resulting in supply chain disruptions. The order required the Financial Regulators to conduct an assessment which included a determination of how identified climate-related financial risk can be mitigated, including through new or revised regulatory standards. These efforts resulted in several new burdensome and costly requirements, such as SEC investor disclosures about climate-related risks, emissions, and targets for public companies, including banks.  

Another notable order rescinded was EO 14110: Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence (AI) from October 2023, which encouraged creating AI-related policies which promoted responsible innovation, competition, and collaboration while being safe and secure.  

Other EOs rescinded by the new order included topics of diversity, equity, inclusion, and accessibility (DEI), immigration, and energy-related issues involving oil, gas, wind, and water uses. The rescissions will likely affect community banks from the standpoint of their impact on their customer base, e.g., business customers whose employee base include immigrants, customers with a connection to energy and energy-related fields, and potentially in DEI-related efforts. Other energy-related EOs (Declaring a National Energy Emergency, Unleashing Alaska’s Extraordinary Resource Potential, Unleashing American Energy) will also impact customers in such industries with new or revised business needs.  

Through the America First Trade Policy  EO, the new administration seeks to prioritize domestic production and reduce trade-related uncertainties. This policy could influence credit demands in local markets. Community banks may see changes in small-business borrowing trends as industries adapt to a new trade environment. New employment opportunities may also be experienced as businesses expand to meet new or increased product and service demands.  

As a result of the Delivering Emergency Price Relief for American Families and Defeating the Cost of Living Crisis EO, department and agency heads are to deliver emergency price relief through:   

  • Lowering the cost of housing and expanding the housing supply  
  • Eliminating administrative expenses and rent-seeking practices that increase healthcare costs  
  • Eliminating requirements that raise the costs of home appliances  
  • Creating employment opportunities for American workers and draw discouraged workers into the workforce  
  • Eliminating climate policies that increase the costs of food and fuel  

While the executive order aims to reduce costs and stimulate economic activity, its success depends on implementation and broader market responses. These cost savings should impact deposit balances and lending needs with customers having greater purchasing power from the savings reflected in lowered living costs.  

Several EOs directly affect federal agencies whereby each are to find efficiencies, freeze hiring, and return to the office. An order establishing the President’s Department of Government Efficiency (DOGE), the department, together with the OMB Director, is required to submit a plan within 90 days to reduce the size of the Federal Government’s workforce through efficiency improvements and attrition, at which point the hiring freeze will be lifted except for the IRS, for which the freeze is indefinite.  

Within this DOGE EO there is a mandate regarding Modernizing Federal Technology and Software to Maximize Efficiency and Productivity. Potential positive benefits to community banks include if federal agencies “improve quality and efficiency of government-wide software, network infrastructure, and information technology (IT) systems. Among other things, the United States Digital Services Administrator shall work with Agency Heads to promote inter-operability between agency networks and systems, ensure data integrity, and facilitate responsible data collection and synchronization.”  

The Hiring Freeze EO directs agencies not to fill any vacant federal positions or create any new roles (with exceptions for military personnel and positions related to immigration enforcement, national security, or public safety). By freezing new hires across federal agencies, including those overseeing financial regulation, this order could create operational bottlenecks for community banks seeking regulatory guidance, delay examinations, and cause delays in processing and disbursement of government-backed loans. Impact will depend on how long the freeze remains in effect and whether exemptions are granted for key regulatory and operational positions. Community banks should prepare for potential delays and adjust their interactions with federal banking agencies accordingly. Community banks will also notice a change in federal regulator staff locations as federal employees have been ordered to end remote work and Return to Work In-Person at their respective duty stations on a full-time basis as soon as practicable, unless an exemption is necessary.  

The EO issued last Thursday, Strengthening American Leadership in Digital Financial Technology, will have a significant impact on community banks. While promoting and protecting fiat currency, the EO seeks to bring regulatory clarity of digital assets. For purpose of the order, “digital asset” refers to any digital representation of value that is recorded on a distributed ledger, including cryptocurrencies, digital tokens, and stablecoins. The order defines “Central Bank Digital Currency (CBDC)” as a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank. The term “blockchain” means any technology where data is:  

  • Shared across a network to create a public ledger of verified transactions or information among network participants; 
  • Linked using cryptography to maintain the integrity of the public ledger and to execute other functions;  
  • Distributed among network participants in an automated fashion to concurrently update network participants on the state of the public ledger and any other functions; and 
  • Composed of source code that is publicly available. 

This order revokes EO 14067: Ensuring Responsible Development of Digital Assets and the Treasury’s “Framework for International Engagement on Digital Assets” both from 2022. Treasury is also ordered to rescind all policies, directives, and guidance issued pursuant to the 2022 order and framework.  

Further, the order establishes the National Economic Council the President’s Working Group on Digital Asset Markets to be chaired by the Special Advisor for AI and Crypto. The working group is also to include the Secretary of the Treasury, Attorney General, Secretary of Commerce, Secretary of Homeland Security, OMB Director, Assistant to the President for National Security Affairs, Assistant to the President for National Economic Policy, Assistant to the President for Science and Technology, Homeland Security Advisor, Chairman of the SEC, and Chairman of the CFTC. 

Within 30 days of the order, certain agencies are to identify all regulations, guidance documents, orders, or other items that affect the digital asset sector. Within 60 days, each are to submit recommendations on whether each identified regulation, guidance document, order, or other item should be rescinded or modified, or, for items other than regulations, adopted in a regulation. Within 180-days, a report is to be made to the President which is to recommend regulatory and legislative proposals that advance the policies established in the order. In particular, the report is to:  

  • Propose a Federal regulatory framework governing the issuance and operation of digital assets, including stablecoins, in the United States. The report is to consider provisions for market structure, oversight, consumer protection, and risk management. 
  • Evaluate the potential creation and maintenance of a national digital asset stockpile and propose criteria for establishing such a stockpile, potentially derived from cryptocurrencies lawfully seized by the Federal Government through its law enforcement efforts. 

The working group is to hold public hearings and receive individual expertise from leaders in digital assets and digital markets. Additionally, except to the extent required by law, agencies are prohibited from undertaking any action to establish, issue, or promote CBDCs within the jurisdiction of the United States or abroad. Any ongoing plans or initiatives at any agency related to the creation of a CBDC within the jurisdiction of the United States is immediately terminated, and no further actions may be taken to develop or implement such plans or initiatives.  

The WBA Legal, Government Relations, and Communications teams will continue to monitor EOs issued by the new administration, and report on such matters accordingly. WBA will remain engaged with all federal agencies through the efforts started by the EOs, including in the most recent digital asset order. Any questions regarding the executed orders may be directed to WBA Legal at wbalegal@wisbank.com

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Executive Letter: Share Your Experiences Regarding Burdensome Regulations

By Rose Oswald Poels

The federal bank regulatory agencies are seeking comment on interagency efforts to reduce regulatory burden: the Federal Deposit Insurance Corporation (FDIC); the Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC).

Anyone working in banking knows that it is one of the most highly regulated industries in the country. While we certainly respect the need for regulations aimed at protecting consumers, preventing bank failures, and promoting stability in our nation’s financial system, this opportunity to comment on regulatory burden is welcome.

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the Federal Financial Institutions Examination Council (FFIEC) and federal bank regulatory agencies to review their regulations every ten years to identify outdated or otherwise unnecessary regulatory requirements for their supervised institutions.

To facilitate this review, the agencies divided their regulations into 12 categories (in alphabetical order):
• Applications and Reporting
• Banking Operations
• Capital
• Community Reinvestment Act
• Consumer Protection
• Directors, Officers, and Employees
• International Operations
• Money Laundering
• Powers and Activities
• Rules of Procedure
• Safety and Soundness
• Securities

The agencies are now soliciting comments on their regulations in three categories: Consumer Protection; Directors, Officers, and Employees; and Money Laundering. The public has 90 days from publication in the Federal Register to comment on the relevant regulations.

On February 6, 2024, the agencies published the first notice addressing the following categories of regulations: Applications and Reporting; Powers and Activities; and International Operations. The comment period for those categories closed on May 6, 2024.

Over the next two years, the agencies will request comment on regulations in the remaining categories, asking the public to identify the regulations they believe are outdated, unnecessary, or unduly burdensome. The agencies will review the comments received and determine whether further action is appropriate with respect to the regulations.

WBA will be sharing comments in response to this interagency request. It is crucial to amplify the voice of bankers in Wisconsin who are dealing with unnecessarily onerous regulatory requirements. Please contact me to share stories of how your bank is impacted by regulations from FDIC, FRB, and OCC in the categories of Consumer Protection; Directors, Officers, and Employees; and Money Laundering that could be described as outdated, unnecessary, or unduly burdensome as well as suggestions on how to ease those burdens. It is incredibly helpful to get input from WBA members, so I welcome the frank assessments, common sense strategies, and practical potential solutions provided by leaders of Wisconsin’s banking industry.

In related news, the agencies are holding a virtual public outreach meeting on September 25, 2024, as part of their review.

The Economic Growth and Regulatory Paperwork Reduction Act Virtual Outreach Meeting is an opportunity for interested stakeholders to present their views on the six categories of regulations listed in the first two Federal Register notices (described above): Applications and Reporting; Powers and Activities; International Operations; Consumer Protection; Directors, Officers and Employees; and Money Laundering.

Individuals interested in providing oral comments need to register by August 9, 2024, and indicate the regulatory category they would like to discuss. The agencies will notify those individuals selected to provide comments by September 9, 2024. Click here to register.

Advance registration is not required to attend this virtual public meeting as an observer.

The agencies will announce additional public meetings in 2024 and 2025. Details will be available on the EGRPRA website.

Since this request for input on regulatory burden in our industry only occurs every ten years, I encourage you to take advantage of this opportunity and share your insights.

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Executive Letter: 2024 Brings Adjusted Regulatory Thresholds

By Rose Oswald Poels

Happy New Year! As we step into 2024, there are several thresholds which have been adjusted by both state and federal regulators which go into effect now that the new year has arrived. Below is a collection of thresholds effective January 1, 2024, including a link to pull each publication for reference.

Regulation Z, TILA

  • The exemption threshold for Regulation Z (Truth in Lending Act) will increase to $69,500, up from $66,400.
  • The exemption threshold under Regulation Z for HPML appraisals will increase to $32,400, up from $31,000.
  • The asset-size threshold under Regulation Z which exempts creditors from the requirement to establish an escrow account for HPMLs will be:
    • For creditors and their affiliates that regularly extended covered transactions secured by first liens, the asset-size threshold is adjusted to $2.640 billion, up from $2.537 billion; and
    • The exemption threshold for certain insured depository institutions with assets of $10 billion or less is adjusted to $11.835 billion, up from $11.374 billion.
  • The dollar amount thresholds under Regulation Z for HOEPA and QM-related loans have been adjusted as follows:
    • For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $26,092.
    • The adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,305.
    • For QMs under the General QM loan definition in § 1026.43(e)(2), the thresholds for the spread between the annual percentage rate (APR) and the average prime offer rate (APOR) will be:
      • 2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $130,461;
      • 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $78,277 but less than $130,461;
      • 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $78,277;
      • 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $130,461;
      • 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $78,277; or
      • 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $78,277.
    • For all categories of QMs, the thresholds for total points and fees will be:
      • 3% of the total loan amount for a loan greater than or equal to $130,461;
      • $3,914 for a loan amount greater than or equal to $78,277 but less than $130,461;
      • 5% of the total loan amount for a loan greater than or equal to $26,092 but less than $78,277;
      • $1,305 for a loan amount greater than or equal to $16,308 but less than $26,092; and
      • 8% of the total loan amount for a loan amount less than $16,308.
  • For open-end consumer credit plans under TILA, the threshold that triggers requirements to disclose minimum interest charges will remain unchanged at $1.00.

Regulation C, HMDA

  • The asset-size threshold to be exempt from collecting HMDA data in 2023 is adjusted to $56 million, up from $54 million.

Community Reinvestment Act (CRA)

  • The Board of Governors of the Federal Reserve System (FRB) and Federal Deposit Insurance Corporation (FDIC) CRA regulations have adjusted the asset-size thresholds used to define “small bank” and “intermediate small bank” to be:
    • Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.564 billion; and
    • Intermediate small bank means a small bank with assets of at least $391 million as of December 31 of both of the prior two calendar years and less than $1.564 billion as of December 31 of either of the prior two calendar years.
  • The Office of the Comptroller of the Currency (OCC) made the identical adjustments to the asset-size thresholds used to define “small bank or savings association” and “intermediate small bank or savings association.”

Required Escrow Rate Under Wisconsin Law

  • The Wisconsin Department of Financial Institutions (WDFI) has established the interest rate that must be paid on required escrow accounts under section 138.052(5) of the Wisconsin Statutes. The new rate is 0.18%.

Other Regulatory Thresholds and Limits

  • The dollar amount of the maximum allowable charge for disclosures by a consumer reporting agency to a consumer pursuant to Fair Credit Report Act (FCRA) section 609 for the 2024 calendar year is $15.50.
  • The exemption threshold for Regulation M (Consumer Leasing Act) will increase to $69,500, up from $66,400.
  • The FDIC Designated Reserve Ratio remains 2% for 2024.
  • The OCC is maintaining the general assessment, independent trust, and independent credit card fee schedules from 2023. There will be no inflation adjustment to assessment rates. OCC is increasing the hourly fee for special examinations and investigations to $170 from $161. The increase is to ensure adequacy in recovering the cost of conducting special examinations and investigations.
  • Contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.
  • Multifamily loan purchase caps for Fannie Mae and Freddie Mac will be $70 billion for each enterprise, for a combined total of $140 billion. The caps reflect current market forecasts. FHFA will continue to require that at least 50% of Fannie’s and Freddie’s multifamily business be mission-driven affordable housing.
  • The conforming loan limit values for mortgages to be acquired by Fannie Mae and Freddie Mac in 2024 for one-unit properties will be $766,550, an increase from $726,200.
  • New loan limits for FHA’s Single Family Title II Forward and Home Equity Conversion Mortgage (HECM) insurance programs, based upon property size and location, range from $498,257 to $3,317,400.
  • Beginning January 1, 2024, the standard IRS mileage rates for the use of a car (also vans, pickups, or panel trucks) will be as follows. The rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
    • 67 cents per mile driven for business use, up 1.5 cents from 2023;
    • 21 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, a decrease of 1 cent from 2023; and
    • 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2023.

I look forward to this new year and am excited about what 2024 may bring. Be sure to stay connected with WBA through our various releases and publications, and through our social media channels.

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Executive Letter: Regulatory Advocacy in Action

By Rose Oswald Poels

Last week, 12 bankers joined WBA’s Heather MacKinnon, VP – legal, and me in Washington, D.C. for our annual trip to meet with regulators. This trip is always a productive one, resulting in impactful advocacy and conversations given the smaller group size. In the span of only two half-days, our group was able to meet with senior officials from the Federal Reserve, FDIC, OCC, CFPB, FinCEN, and FHFA. The topics we covered in detail included representment fees, bank capital/liquidity, Section 1071, Section 1033, beneficial ownership, FHLB reform, cybersecurity, and other top examination concerns.

Our conversation with Fed Governor Miki Bowman focused on the Fed’s recent compliance bulletin published last month noting that Fed member banks are now being cited with an unfairness UDAP violation if they are charging representment fees. This retroactive application of the Fed’s new expectation as it relates to these fees is creating results that are unjust and wrong. Furthermore, it is also wrong to be creating new rules for banks to follow through the mere issuance of a compliance publication rather than following the formal Administrative Procedures Act rulemaking process. Governor Bowman was surprised to hear of the retroactive nature of these exam findings and agreed to continue to talk with WBA and affected banks about the matter. If you are a Fed member bank and have received a similar finding in your recent exam reports, please let me know and we will include you in our follow-up conversations with the Fed.

Back in April of 2022 when the FDIC first published its new expectations regarding NSF and representment fees in a guidance document, many bankers and trade associations including WBA advocated against any retroactive application of their new interpretation, among other concerns. This resulted in the FDIC eventually adjusting its focus in exams to be prospective only in nature, and to our knowledge did not cite anyone for an unfairness UDAP violation. In our conversations last week with senior FDIC officials, it sounded as though the FDIC may now begin issuing unfair UDAP violations as well. FDIC Director Jonathan McKernan also shared his thoughts with our group around lessons learned from the bank failures earlier this year, encouraged bankers and WBA to comment on the impact the BASEL capital proposal could have on mortgage operations, and supported the role of community banks in fostering an innovative economy.

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Fed Governor Miki Bowman
FDIC Director Jonathan McKernan
OCC Acting Comptroller Michael Hsu
Group photo outside White House
CFPB senior officials
Group photo on rooftop

Much of the focus of our conversation with OCC Acting Comptroller Michael Hsu was on safety and soundness matters, including the need for banks to stress test their liquidity contingency funding plans and analyze how “sticky” and stable banks’ deposits really are.

With senior officials from CFPB, among other topics, we stressed the industry’s frustration with the Agency’s and Administration’s continued use of “junk fees” to describe fees that are fully disclosed in transparent ways — often on bank websites — in advance to consumers. We discussed beneficial ownership operational concerns at length with FinCEN officials, and learned from the FHFA that their document on FHLB reform will be released “soon.” Overall, the conversations with all six agencies were very productive.

I would like to thank the following bankers for joining WBA this year: Adam Bellmer, Johnson Financial Group; Dave Feldhaus, Federal Home Loan Bank of Chicago; Kristen Gagliano, North Shore Bank; Donna Hoppenjan, Mound City Bank; Corey Hoze, Associated Bank; Caryn Langolf, Bank First; Tom Mews, First National Community Bank; Ryan Kamphuis, Bristol Morgan Bank; Greg Ogren, Security Bank Shares; Dan Peterson, The Stephenson National Bank and Trust; John Udvare, The Equitable Bank; and Theresa Wiese, First Business Bank. If you are interested in joining WBA on this trip next October, please let me know!

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Desk with gavel and scales
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Compliance Column: A Refresher on Rescission Rules

By Scott Birrenkott

One of the consumer protection rights afforded by Truth in Lending is the right of rescission. While there are no changes to this rule, it is a frequent topic for questions received through the Wisconsin Bankers Association’s (WBA) Legal Call Program. It is important that bankers understand and consider various aspects of this rule.

The right of rescission can be found under Regulation Z for both closed-end and open-end credit. Generally speaking, rescission applies in a credit transaction secured by a consumer’s principal dwelling. For purposes of rescission, each consumer whose ownership interest is subject to the security interest shall have the right to rescind the transaction, unless exempt.

One of the most common questions WBA receives is: who gets rescission?

All consumers receive the right of rescission. Reg Z defines consumer as a natural person to whom consumer credit is offered or extended. However, for purposes of rescission, the term also includes a natural person in whose principal dwelling a security interest is, or will be, retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest. In short, any consumer with an ownership interest in the dwelling taken as security receives the right of rescission. This could include a non-borrower.

For example, consider a situation where a borrower’s parents pledge their house as security for a covered transaction. The parents are not borrowers and thus, not obligated to the transaction. However, because their ownership interest in the house is subject to the security interest, they must be provided with the right of rescission.

It is also worth noting that sometimes a trust can be considered a consumer for purposes of rescission. Credit extended to trusts established for tax or estate planning purposes or to land trusts is considered to be extended to a natural person for purposes of the definition of consumer. In the case where the property is held by a trust, lenders should make sure to review Reg Z to see whether the trust might be a consumer for purposes of rescission.

Another common question WBA receives is whether a consumer can waive the right to rescind. In certain rare circumstances this is possible, but only in the case of a bona fide personal financial emergency.

The rule does not provide examples, but the situation must present a true emergency. For example, during the COVID pandemic, there may have been truly bona fide personal financial emergencies which warranted a need to receive credit without a waiting period. As a result, whether such an emergency exists is a fact-specific question. WBA has heard of situations where the borrowers are going on vacation and want to close without a waiting period, or where the seller is growing anxious and does not want to wait any longer. Such situations are not emergencies. A true, bona fide financial emergency must exist for it to be possible to waive rescission.

While rescission is not a new rule nor have there been any changes, the above article covers some of the more frequently asked questions.

For reference, also consider the following citations to Regulation Z:

  • Rescission for open-end-credit: 1026.15
  • Rescission for closed-end-credit: 1026.23
  • Definition of consumer: 1026.2(a)(11)
  • Discussion of trusts, which may be a consumer, for purposes of rescission: 1026.3(a)-10
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Executive Letter: Federal Judge in Texas Delays Section 1071 Mandatory Compliance Dates for Some

By Rose Oswald Poels

Through an order issued earlier this week, a federal judge in the U.S. District Court, Southern District of Texas, McCallen Division enjoined implementation and enforcement of the Bureau of Consumer Financial Protection’s (CFPB) Section 1071 Small Business Data Collection and Reporting Rule while the United States Supreme Court hears a challenge to CFPB’s funding structure. This enjoinment however does not apply to all banks.

The American Bankers Association (ABA), Texas Bankers Association (TBA), and Rio Bank of McAllen, Texas (collectively, the plaintiffs) had jointly filed a lawsuit against CFPB earlier this spring seeking an injunction for all lenders covered by the rule. The plaintiffs requested the court enjoin the Section 1071 rule nationwide until the U.S. Supreme Court resolves the constitutionality of CPFB’s funding structure.

In 2022, the Fifth Circuit held CFPB’s funding structure unconstitutional because Congress funded CFPB directly from the Federal Reserve; such funding contradicts the Constitution’s Appropriations Clause. CFPB appealed the Fifth Circuit’s decision. See CFPB v. Community Financial Services Association of America. The U.S. Supreme Court agreed to take up the case; however, the Supreme Court is not scheduled to hear arguments until October. A decision by the Supreme Court could be released any time before the end of June 2024. These dates are very close to mandatory implementation of the Section 1071 rule — which for some banks begins as soon as October 2024.

As mentioned above, the federal Texas judge enjoined implementation and enforcement of CFPB’s Section 1071 rule. Unfortunately, however, the court denied the plaintiff’s request for nationwide injunctive relief. The order only applies to the plaintiffs’ members. As a result, the relief only applies to ABA members, TBA members, and to Rio Bank.

I am currently in discussion with outside counsel regarding the narrowness of the order and whether other steps may be taken to help find relief for WBA-member banks not covered by the order. I encourage banks that have yet to determine applicability of Section 1071 to the bank to determine whether and when it must comply with Section 1071, as applicable.

As a reminder, implementation of the Section 1071 rule is staggered. Banks that originate more than 2,500 covered credit transactions in each of the two preceding calendar years must comply with the rule no later than October 1, 2024; banks that originate less than 2,500 but at least 500 covered credit transactions in each of the two preceding calendar years must comply no later than April 1, 2025; and banks that originate less than 500 but at least 100 covered credit transactions in the previous two calendar years must implement by January 1, 2026.

A covered credit transaction is one that meets the definition of “business credit” under Regulation B unless the credit is specifically excluded by the Section 1071 rule. Agricultural purpose loans are included in the Regulation B definition. Specifically excluded credit from the definition of a covered credit transaction under Section 1071 are: trade credit, HMDA-reportable transactions, insurance premium financing, public utility credit, securities credit, incidental credit, factoring, and leases, as defined by the rule. The ability to exclude HMDA-reportable transactions from the definition of covered credit transaction applies to both HMDA-reporting and non-HMDA reporting banks.

Read the Order
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Executive Letter: Regulatory Advocacy in Action!

Rose Oswald PoelsBy Rose Oswald Poels

Last week, bankers from Wisconsin and Illinois traveled to Washington D.C. together for in-person meetings with banking regulators. This trip, organized for the last 11 years by WBA, has for the last two years also welcomed bankers from Illinois.

I have always found this trip to be productive given the intentionally smaller group of bankers who attend and the senior level officials who meet with us. This year was no exception!

Like visits to Washington D.C. to meet with our elected officials, meetings with regulators do not result in meaningful, visible change overnight. However, if we don’t share the stories demonstrating the impact that regulations have on banking operations and consumers in the Midwest, their perspective is only what they know and see in Washington D.C. As the burden of federal regulations remains substantial on banks, it is critical that we continually advocate so to lessen the impact.

This year, our primary list of issues included small business data collection (1071 Rule), NSF/representment of checks and UDAAP (Unfair, deceptive, or abusive acts and practices), overdraft programs, deposit insurance assessment rates, CRA, and the definition of tangible equity capital in Federal Housing Finance Agency (FHFA) rules.

Our group had several meaningful conversations over the short two-day trip with senior officials from the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and FHFA, as well as with Director Chopra from the Consumer Financial Protection Bureau (CFPB). During these conversations we learned it is likely that both the final CRA modernization rule and the 1071 rule would be issued at around the same time; however, there could be a phased-in implementation period for 1071.

The general counsel for FHFA heard from several of us in attendance regarding the very real and negative impact the current definition of tangible equity capital could have on community banks’ ability to borrow from the Federal Home Loan Banks and promised to share this impact with decisionmakers starting that afternoon. Overall, I was very pleased with the active involvement of the bankers during the meetings and the level of engagement we had with the various regulators.

I would like to thank the following Wisconsin bankers for joining me and WBA’s Vice President – Legal Heather MacKinnon on this trip:

  • WBA Chair Dan Peterson, Stephenson National Bank and Trust in Marinette
  • Al Araque, Johnson Financial Group in Racine
  • PJ Childers, Crossbridge Community Bank in Tomahawk
  • Kristen Gagliano, North Shore Bank in Brookfield
  • Corey Hoze, Associated Bank in Milwaukee
  • Mark Oldenberg, Security Financial Bank in Eau Claire
  • Terry Rosengarten, Unity Bank in Augusta
  • Theresa Wiese, First Business Bank in Madison

I would also like to thank Dave Feldhaus from the FHLBank of Chicago for joining us on this trip and the FHLBank of Chicago for sponsoring our dinner.

If you are interested in joining WBA on its annual regulatory advocacy trip in October of 2023, please let me know. As you can tell, we accomplish a lot in a short period of time and your continued advocacy for our industry makes the greatest impact in ushering the movements most important to our communities.

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Executive Letter: FHLBank Regulation Can Impact a Member Bank’s New Advance Option

Rose Oswald PoelsBy Rose Oswald Poels

Given recent rate increases by the Federal Reserve and the overall market impact of the current economy, banks that have lines with a Federal Home Loan Bank (FHLBank) need to be mindful of how FHLBank regulation can impact a member bank’s ability to obtain new FHLBank advances or letters of credit. With this Executive Letter, I wanted to be certain FHLB member banks are aware of the possibility.

Under FHLBank Regulation 12 CFR 1266.4(b), a FHLBank cannot make a new advance to a member bank whose tangible capital is not positive. To make a determination of whether a member bank has negative tangible capital, the FHLBank will use the member bank’s most recently available Call Report data. A member bank would not be considered to have negative tangible capital until its quarterly report is filed.

As an exception, a new advance may be made if the member bank’s prudential federal regulator (the Federal Reserve or OCC) or federal insurer (FDIC) requests, in writing, the FHLBank lend to the member bank. It is my understanding that the federal regulators are currently not willing to issue such instruction unless a particular member bank has a dire liquidity need for the advance.

Historically, bank capital calculations of the prudential federal banking regulators and the Federal Housing Finance Agency (FHFA) were similar. However, recent changes made to capital calculations by the banking regulators have not been adopted by FHFA. In particular, under FHLBank regulations the definition of tangible capital is inclusive of Accumulated Other Comprehensive Income (AOCI). Therefore, this difference will impact those member banks that made the election to opt-out of the requirement to include components of AOCI when calculating common equity tier 1 capital under Basel III rules.

It is important to note that the FHLBank regulation does allow member banks with negative tangible capital to renew outstanding advances, for successive terms of up to 30 days each. There is no limit to the number of times a member bank may roll over an existing advance. Such member banks may also renew outstanding advances for a term greater than 30 days at the written request of the appropriate federal banking regulator or FDIC as federal insurer.

It is also important to note that the limitation for a new advance does not impact a member bank’s use of Community Investment Products or for a member bank’s ability to sell loans into FHLBank’s Mortgage Partnership Finance (MPF) Program.

FHLBank member bankers who may be impacted by this limitation should work closely with their FHLBank Sales Director for more information specific to the member. Affected member banks should also work closely with your accounting and investment resources as there may be options to consider as a means to avoid reaching a negative tangible capital position. Accounting and investment resources will also be able to explain the impact of such options to the member bank in areas other than under FHLBank regulation.

WBA is monitoring the impact of this FHLBank regulation component and is working for a resolution whereby banks whose tangible capital is negative due to a difference in tangible capital calculations are not negatively impacted by an inability to obtain new FHLBank advances. WBA plans to advocate for a change in the rule starting with addressing the issue directly with FHFA later this month during our D.C. Regulatory Trip. In addition, WBA is also working to organize an all-member call on this issue — please watch our publications for an announcement of a complimentary webinar in the near future.

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Executive Letter: Review and Act on Deposit-related Activities FDIC Has Identified as Potential UDAAP

Rose Oswald PoelsBy Rose Oswald Poels

In recent conversations with state bankers associations across the country, as well as bankers here in Wisconsin, it is clear that regulators, particularly the Federal Deposit Insurance Corporation (FDIC), are very focused on certain deposit-related activities citing them as violations in examinations, and also identifying them as potential unfair, deceptive, or abusive acts or practices (UDAAP) violations. As a result, I want to highlight these concerns again for the membership as a follow-up to my April 5 Executive Letter e-pub.

In that document, I shared information about how FDIC has identified (a) the assessment of overdraft fees for “force pay” transactions and (b) charging multiple non-sufficient funds fees (NSF fees) for the same transactions presented multiple times against insufficient funds as deposit-related activities which FDIC believes may result in a heightened risk of violations of UDAAP. In that same publication, I made recommendations to help banks take action.

In Wisconsin, as in other states, current FDIC compliance examinations include a review of disclosures and charges for these activities. FDIC examiners have been aggressive with their new interpretations, and time is of the essence for banks to act. In some cases, WBA understands that banks receiving these violations are told to go back at least 12 months to determine consumer harm.

With FDIC adopting a new interpretation that disclosing that one NSF fee would be charged “per item” or “per transaction” is not clearly defined and does not explain that the same transaction might result in multiple NSF fees if re-presented, banks should review disclosures to determine whether FDIC’s new interpretation affects the bank. If it does, banks should revise disclosure language accordingly and consider other risk-mitigating steps as outlined by FDIC in the recent publications included in the April 5 Executive Letter.

A bank needs to also understand its actual presentment process and whether it has any ability or inability to identify items resubmitted by a merchant for payment. Review should also include whether the bank can track or identify when a check — presented in physical form the first time — is represented as Automated Clearing House (ACH) the second time by the merchant. Banks should be prepared to explain to examiners their processes and any operational and system limitations in the ability to identify represented items or to trace items if an item was converted when represented.

With respect to the issue of assessing overdraft fees for “force pay” transactions, if a “no pay” bank used the Regulation E model Form A-9 to solicit a consumer’s authorization or opt-in to assess overdraft fees for ATM and one-time point-of-sale (POS) debit card transactions in “force pay” transactions, that model form should not be used in that manner. It was not intended for such transactions. In such situations, banks should review how best to disclose their practice for “force pay” transactions with their counsel.

Failure of a bank to take action will likely result in FDIC citing a UDAAP violation and potentially imposing consumer reimbursement of charges in connection with these deposit-related activities.

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Reminder: Revised General QM Loan Definition

With the mandatory compliance date for the new, revised General QM loan definition just on the horizon, banks should ensure their implementation plans are in place. In terms of a quick-look at dates, CFPB issued a final rule on December 29, 2020 (Final Rule) which amends the General QM loan definition in Regulation Z. The Final Rule included a mandatory compliance date of July 1, 2021. However, on April 27, 2021, CFPB extended that mandatory compliance date to October 1, 2022. The General QM Final Rule was effective on March 1, 2021 and, among other things, replaces the existing 43 percent debt-to-income ratio limit with price-based thresholds. As such, it presents the potential for significant changes to a bank’s mortgage lending operation.

To expand upon the new price-based thresholds with a general summary: a loan meets the revised General QM definition only if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by less than the applicable threshold set forth in the Final Rule as of the date the interest rate is set. Additionally, the Final Rule removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. Consequently, it amends the consider and verify requirements in Regulation Z and its associated commentary. First, it outlines the minimum considerations required by creditors, including, for example, the consumer’s current or reasonably expected income or assets. Second, it requires that creditors verify those considerations using reasonably reliable third-party records and reasonable methods and criteria.

Banks have likely already taken time to evaluate the categories of QMs they originate, and how the revised General QM definition may or may not affect its current loan policy and underwriting procedures. Even banks which originate Small Creditor QMs should still consider the extent to which they may or may not original General QMs. For example, does bank originate General QMs? Will it continue to do so, or will it exclusively utilize the Small Creditor QM exception, if applicable?

Given the mandatory compliance date of October 1, 2022 banks should confirm that their implementation steps are in place. Banks should prepare to fully transition current policies and procedures to conform with the new definition and consider what training might be necessary in advance of and after the transition.

As an additional resource, WBA has prepared an ATR/QM Toolkit to assist bankers.

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