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Bryce J. Hunter - Member; Chair, Tax Credits Practice Group; Chair, Community Banking Group; Co-Chair, Banking and Finance Practice Group; and Editor of Promissory Notes

Joshua L. Jarrell - Member; Chair, Public & Project Finance Practice Group; Co-Chair, Banking and Finance Practice Group

“But many smaller institutions, some of whom turned to more expensive borrowings to replace deposits lost in the spring, don't have as many ways to neutralize their own rising costs.”

Why this is important: Many large lenders increased their deposit rates during the second quarter 2023. That is an ominous sign for smaller regional banks. These larger lenders have the pricing power and diversity to earn more from loans even as they pay more to keep deposits, a critical source of funding. However, many smaller lenders, some of whom turned to more expensive borrowings to replace deposits lost in the spring, don't have as many ways to neutralize their own rising costs. Some are expected to revise down a key measure of loan profitability, which could weigh on their market performance and investor confidence.

Regional banks were the part of the industry that came under the most stress earlier this year following the problems that caused several mid-sized institutions to fail. Some of these banks then struggled in the first quarter with drops in net interest income, which is the difference between what a lender earns from loans and pays out to depositors. They began raising their rates to keep or to bring back depositors. The larger banks added to the pressure regional banks were under by making their own rate increases to compete for depositors. The changes contributed to significant surges in interest expenses. By example, interest expense increased by 465 percent at both JPMorgan and Wells Fargo as compared to the year-earlier period. The extra costs were absorbed by raising the costs of their lending. 

These interest expense increases will be a cost of doing business in this new environment, one in which lenders will have to balance in order to attract depositors while not scaring away loan customers. --- Bryce J. Hunter

Why this is important: In the wake of the granting of a Motion for Preliminary Injunction filed by the ABA and TBA, compliance for the CFPB’s Section 1071 final rule has been delayed. As a result of the Order, TBA and ABA asked CFPB Director Rohit Chopra to use his discretion to apply the stay to all FDIC-insured banks. Section 1071 would require banks to collect and report small business loan application data. Smaller banks, in particular, have raised concerns that the proposed regulation would be overly cumbersome and overstretch their resources.  

In their request to Chopra, the ABA and TBA stated, “As you know, we requested relief for every entity subject to the final rule, but the court limited that relief to members of our associations (including co-plaintiff Rio Bank). While most FDIC-insured banks fall within our membership, there are some that do not. We recognize the bureau’s desire to continue pressing forward with certain covered institutions and so are only asking for your consideration of extending the stay to the banking industry. We believe this would simplify things for both your agency and the regulated community.”

The judge’s preliminary injunction came in a case brought by TBA, Rio Bank and ABA challenging the Section 1071 rule on administrative and constitutional grounds. The injunction stays the final rule while a constitutional challenge to the CFPB is pending in the U.S. Supreme Court, allowing banks to avoid expensive compliance preparation with the bureau’s constitutionality under question. A decision in the separate case is expected in the first half of 2024.

“With oral argument in Community Financial in 60 days and a decision likely within six to eight months, we believe the CFPB extending the relief already provided to numerous banks nationwide would be prudent and ameliorate confusion,” TBA and ABA added in their letter to Chopra. “This could take whatever form the Bureau deems appropriate (i.e., amending compliance dates or providing other guidance).” --- Bryce J. Hunter

“Experian’s study explored consumers' online interactions and expectations regarding security and customer experience.”

Why this is important: More than 50 percent of consumers are more concerned about fraud now compared to a year ago, according to a study by Experian, a multinational data analytics and consumer credit reporting company.

Experian’s “2023 U.S. Identity and Fraud Report” found consumers and businesses were worried about fraud and online security, with nearly two-thirds of people surveyed reporting that they are concerned or somewhat concerned with online security. The report is based on survey responses from more than 2,000 consumers in the U.S., as well as a separate survey of more than 200 businesses in North America, ranging in size from $10 million to above $1 billion in revenue. The report comes as most financial institutions and other lenders are preparing to increase spending on compliance measures and projects to combat different types of fraud.  

The Experian survey found consumers were most concerned about identity theft (64 percent), followed by stolen credit card information (61 percent) and online privacy (60 percent). Among the businesses surveyed, nearly 70 percent reported that fraud losses have increased in recent years. Another finding was that authorized push payment fraud was the leading fraud event type, experienced by 40 percent of businesses (“push payment fraud” occurs when fraudsters deceive consumers or individuals at a business to send them a payment under false pretenses to a bank account controlled by the fraudster). Most businesses said they would increase their fraud budgets by 8 to 19 percent, likely responding to the high expectations of consumers, with 85 percent saying they expected businesses to respond to fraud concerns. 

Experts anticipate that a portion of the increased spending will go towards research and the application of machine learning to fraud identification strategies. The study found nearly 60 percent of businesses were already emphasizing or are looking to build machine learning capabilities. The rise of “AI” in fighting financial crime has been supported by businesses, with 90 percent of the businesses in the Experian survey currently using machine learning models reporting a high level of confidence in their effectiveness at fraud detection and prevention. 87 percent of those businesses reported high levels of confidence at customer authentication.

Kathleen Peters, chief innovation officer for Experian’s decision analytics business in North America, said: “With the right identity and fraud prevention solutions in place, businesses can take a multilayered approach to verify identities, properly treat fraud and provide a frictionless customer experience that builds trust.” --- Bryce J. Hunter

"Recently, Office of the Comptroller of the Currency (“OCC”) Senior Deputy Comptroller for Large Bank Supervision Greg Coleman testified on OCC supervision of climate-related financial risks before the U.S. House of Representatives’ Committee on Financial Services’ Subcommittee on Financial Institutions and Monetary Policy."

Why this is important: Coleman’s testimony reinforces the OCC’s focus on climate-related financial risks as it relates to the safe and sound operation of national banks and federal savings associations. In his testimony, Coleman emphasized that, “The OCC does not and will not tell bankers what customers or legal businesses they may or may not bank.” Instead, the OCC’s focus is on climate-related financial risk management.

In late 2021, the OCC published draft “Principles for Climate-Related Financial Risk Management for Large Banks” (the principles). In 2022, the OCC established an Office of Climate Risk to lead its efforts concerning climate-related financial risk, including in the areas of supervision, policy, and external engagement.

Coleman’s testimony clarifies that the OCC does not intend for its efforts aimed at the large banks to “trickle down” to community banks, but provides community banks with a message that they need to be thinking about climate-related risks. Also, it is likely that community banks that have holding companies subject to SEC reporting requirements, or that are themselves subject to similar reporting requirements of the federal bank regulatory agencies, will be required to make new detailed climate-related disclosures in their SEC filings. As climate-related issues continue to be on the regulatory to-do list and are pushed by other stakeholders, community banks must be prepared to address these issues. --- Bryce J. Hunter

A special article contribution from our colleagues Heather M. Garrison and Peter R. Rich with our Labor & Employment Practice Group.

Although developments in higher education on the issue of affirmative action in admissions may not seem relevant to private employers, the U.S. Supreme Court’s recent decision should prompt employers to reexamine their own diversity, equity, and inclusion (“DEI”) and voluntary affirmative action initiatives to ensure that employment decisions are not unlawfully based on membership in protected classifications.

Click here for the entire article.