The FDIC’s Center for Financial Research has issued a research paper that discusses the use of the information contained in a “digital footprint,” meaning the information that people leave online by accessing or registering on a website, for predicting consumer default.

The researchers considered ten digital footprint variables that included:

  • The device type (e.g. tablet or mobile)
  • The operating system (e.g. iOS or Android)
  • The channel through which a customer comes to a website (e.g. search engine or price comparison site)
  • Two pieces of information about the user’s email address (e.g. includes first and/or last name and includes a number)

According to the researchers, the results of their research suggest that “even the simple, easily accessible variables from the digital footprint proxy for income, character and reputation are highly valuable for default prediction.”  For example, ownership of an iOS device was found to be one of the best predictors for being in the top quartile of income distribution, customers coming from a price comparison website were found to be almost half as likely to default as customers directed to the website by search engine ads, and customers having their names in the email address were found to be 30% less likely to default.  The researchers also found that digital footprint information complements rather than substitutes for credit bureau information, suggesting that a lender that uses information from both sources can make superior lending decisions.

The researchers observe that “digital footprints can facilitate access to credit when credit bureau scores do not exist, thereby fostering financial inclusion and lowering inequality.”  They indicate that their results “suggest that digital footprints have the potential to boost financial inclusion to parts of the currently two billion working-age adults worldwide that lack access to services in the formal financial sector.”

The researchers also comment that regulators are likely to closely watch the use of digital footprints, noting that U.S. lenders using digital footprint information “are likely to face scrutiny whether the digital footprint proxies for [borrower characteristics such as race and gender that may not be considered under the Equal Credit Opportunity Act] and therefore violate fair lending laws.”

 

The FDIC has issued a request for information that seeks comment on how the FDIC can make its communications with insured depository institutions (IDIs) “more effective, streamlined, and clear.”  Concerned that the amount of information the FDIC provides to IDIs can create challenges for banks, particularly community banks, the FDIC is soliciting input “on how to maximize efficiency and minimize burden associated with obtaining information on FDIC laws, regulations, policies, and other materials relevant to RDIs.”  In addition to IDIs and other financial institutions and companies, the FDIC encourages comments from individual depositors and consumers, consumer groups, and other members of the financial services industry.

The RFI contains specific questions on which the FDIC seeks input that address three topics: efficiency, ease of access, and content.  Comments must be received by the FDIC by December 4, 2018.

 

In a recent interview (her first since being sworn in as Chair of the Federal Deposit Insurance Corporation), Jelena McWilliams provided insight into the FDIC’s likely regulatory agenda.

Ms. McWilliams stated that the FDIC’s top priorities included: (1) reducing regulatory burden on community banks; (2) increasing the speed with which the FDIC reviews charter and deposit insurance applications; and (3) assisting banks to introduce new financial products that serve underserved communities.

Unlike the previous FDIC Chair, Martin Gruenberg, Ms. McWilliams expressed a willingness to reexamine bank capital requirements.  Her comments suggest the FDIC might revisit its opposition to a proposal to revise the enhanced supplementary leverage ratio applicable to U.S. global systemically important bank holding companies (GSIB) issued by the OCC and the Board of Governors of the Federal Reserve System that would: (i) set the enhanced supplementary leverage ratio for a GSIB at 50 percent of a the GSIB’s risk-based capital surcharge; (ii) replace the current 6 percent threshold at which an insured depository institution subsidiary of a GSIB is considered “well capitalized” under the prompt corrective action (PCA) framework with a threshold set at 3 percent plus 50 percent of the GSIB surcharge applicable to the insured depository institution; and (iii) make a corresponding change to each GSIB’s external total loss absorbing capacity (TLAC) leverage buffer and long-term debt requirement (and other, minor amendments, to the TLAC rule).

Ms. McWilliams agreed with Mr. Gruenberg that the Volcker Rule, (which bans proprietary trading and which, since the passage of Economic Growth, Regulatory Relief, and Consumer Protection Act, is only applicable to financial institutions with $10 billion of assets or more) is too complicated. Ms. McWilliams voiced her support for rules to revamp the Community Reinvestment Act (CRA), a project that is also on the OCC’s agenda.  Ms. McWilliams said banks need more clarity about what activities qualify for CRA credit and the qualifications for CRA loans, and she also appeared to suggest that CRA assessment areas should be reexamined because banks are closing branches in rural communities to avoid criticism of their CRA activities (or the lack thereof) in those communities, which results in less access to financial services and does not serve the needs of those communities.

Finally, Ms. McWilliams stated that the FDIC is reviewing whether to rescind its guidelines for deposit advance loans and that she is considering allowing applicants seeking deposit insurance to make a preliminary, confidential filing to get feedback before a formal application.  These comments followed her first speech as Chair in June, where she suggested that the FDIC would make faster decisions on deposit insurance applications, a statement that was interpreted as a signal that under her leadership the FDIC might be more receptive to applications from applicants seeking to form an industrial loan company and de novo charters generally.  (In its recent fintech report, the Treasury Department recommended that the FDIC reconsider its guidance on direct deposit advance services and issue new guidance similar to that issued by the OCC.  In May 2018, the OCC issued a bulletin setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks and encouraging banks to engage in such lending.)

Last week, Representative Blaine Luetkemeyer, Chair of the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, and Representative Scott Tipton sent a letter to Jelena McWilliams, Chair of the FDIC, that identified concerns with the FDIC’s interpretations and regulations surrounding brokered deposits and requested the FDIC to revisit its June 2016 Frequently Asked Questions on Identifying, Accepting and Reporting Brokered Deposits “in light of the rapid technological changes in the banking and payments industry.”

Congressmen Luetkemeyer and Tipton assert that the FAQ is inconsistent with the definition of “deposit broker” under 12 C.F.R. § 337.6(a)(2).  The regulation defines a brokered deposit as “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.”  The term “deposit broker” is defined under 12 USC §1831f to include “(A) any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and (B) an agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.”

The Congressmen believe that the broad classifications in the FAQ of what deposits are brokered and when an entity is a deposit broker: (1) exposes institutions to restrictive and costly supervisory limits and deposit insurance assessments; (2) has reduced the number of financial institutions that can afford to participate in certain markets and, thereby, limited consumer access to financial products; (3) interfered with innovation; and (4) diminished the access of financial institutions to “stable sources of deposits,” thereby “limiting the funding banks can make available for lending to small businesses and consumers.”

By way of example, the 2016 FAQ states that deposits generated by “advertising or referrals by third parties (such as nonprofit affinity groups as well as commercial enterprises), in exchange for volume-based fees” would be deemed brokered deposits even if the customers themselves would subsequently become core customers of the institution.  The FAQ further states that “[i]f a company merely designs deposit products or deposit accounts for one or more banks, without placing deposits or facilitating the placement of deposits at these banks, the company will not be classified as a deposit broker,” but if a company also markets a bank’s deposit products in exchange for volume-based fees, then it would be a deposit broker.

When considering the costs of the design of new deposit products and the development of new technological applications to serve financial institution customers, a determination that the use of volume-based fees will cause deposits to be deemed brokered deposits does appear to stifle innovation and limit the ability of financial institutions with fewer resources to develop technological advances that would benefit consumers.

The FDIC has not yet responded.

The federal banking agencies (the Federal Reserve Board, OCC, and FDIC (FBAs)), recently issued a “Policy Statement on Interagency Notification of Formal Enforcement Actions” that is intended “to promote notification of, and coordination on, formal enforcement actions among the FBAs at the earliest practicable date.”  The issuance of the policy statement follows the DOJ’s announcement last month of a new policy to encourage coordination among the DOJ and other enforcement agencies when imposing multiple penalties for the same conduct to discourage “piling on.”

The new policy statement recites that it is not intended as a substitute for routine informal communications among FBAs in advance of an enforcement action, including verbal notification of pending enforcement actions “to officials and staff with supervisory  and enforcement responsibility for the affected institution.”

The policy statement’s key instructions are:

  • When an FBA determines that it will take formal enforcement action against a federally-insured depository institution, depository institution holding company, non-bank affiliate, or institution-affiliated party, it should evaluate whether the action involves the interests of another FBA.  By way of example, the policy statement notes that an entity targeted by an FBA for unlawful practices might have significant connections with an institution regulated by another FBA.
  • If it is determined that one or more other FBAs have an interest in an enforcement action, the FBA proposing the action should notify the other FBA(s) at the earlier of the FBA’s written notification to the targeted entity or when the responsible agency official or group of officials determines that enforcement action is expected to be taken.
  • The information shared should be appropriate to allow the other FBA(s) to take necessary action in examining or investigating the entity over which they have jurisdiction
  • If two or more FBAs is considering bringing a complementary action, such as an action involving a bank and its parent holding company, those FBAs should coordinate the preparation, processing, presentation, potential penalties, service, and follow-up of the enforcement action.

We view the new policy statement as a very positive development.

Jelena McWilliams, President Trump’s nominee, was sworn in on June 5 for a five-year term as FDIC Chairman and a six-year term as a member of the FDIC Board of Directors.  As a result, the FDIC is firmly in the hands of Republicans.  Last month, Republicans also took firm control of the FTC.

As FDIC Chairman, Ms. McWilliams succeeds Martin Gruenberg, who was appointed Chairman by President Obama.  Since his term as an FDIC Board member does not expire until the end of this year, Mr. Gruenberg remains an FDIC Board member.  According to media reports, he has been recommended by Senator Chuck Schumer to serve as FDIC Vice Chairman, the position he held before his nomination as FDIC Chairman.

The other two current FDIC Board members are Comptroller of the Currency Joseph Otting and CFPB Acting Director Mick Mulvaney.  The FDIC Act provides  that the Comptroller and CFPB Director shall be Board members and that the three other members “shall be appointed by the President, by and with the advice and consent of the Senate, from among individuals who are citizens of the United States, 1 of whom shall have State bank supervisory experience.”  The FDIC Act mandates that no more than three Board members may have the same party affiliation.  Accordingly, President Trump must nominate a Democrat or Independent to fill the fifth seat.

American Banker has reported that, in a press call last week regarding the OCC’s new risk report, “Semiannual Risk Perspective for Spring 2018,” Comptroller Otting stated that in July 2018, the OCC expects to announce its decision on whether it will issue special purpose national bank (SPNB) charters to nondepository fintech companies.

Under Acting Comptroller Keith Noreika’s leadership, the OCC defended its authority to grant an SPNB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors (both of which were dismissed).  Mr. Otting has not yet taken a public position on the OCC’s SPNB charter proposal.  However, he has been dismissive of the argument made by opponents of the SPNB charter that it may lead to an inappropriate mixing of banking and commerce and has questioned the continuing need for the current barriers between banking and commerce.

American Banker reported that Mr. Otting also stated in the press call that some potential applicants for a SPNB charter have lost interest in obtaining a charter after learning more about the process for becoming a bank and seemed more focused on partnering with banks.  According to Politico, Mr. Otting expressed concern in the press call about “rent-a-charter” arrangements between banks and non-bank entities.  Mr. Otting was quoted by Politico as having said “We don’t believe that institutions should effectively lend their charter to a vendor.”

In its bulletin issued last week setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by OCC-supervised institutions, the OCC expressed an unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits.  We commented that while the context of the OCC’s view was “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85 of the National Bank Act.  Mr. Otting’s reported comment about “rent-a-charter” arrangements exacerbates this concern to the extent it indicates there is indeed OCC hostility to arrangements that rely on the originating bank’s Section 85 interest rate authority even outside of the small dollar loan context addressed by the bulletin.

For state-chartered banks, state law interest rate limits are preempted by Section 27 of the Federal Deposit Insurance Act.  Many bank partnerships with non-bank entities involve state banks and the FDIC, in interpreting Section 27, has generally tracked the OCC’s views on Section 85.  As a result, the OCC’s views on bank partnerships should also be of concern to state banks entering into arrangements that rely on the originating bank’s Section 27 interest rate authority.

On May 7, 2018, in Arlington, Virginia, the FDIC will host a forum, “Use of Technology in the Business of Banking.”  Registration is required to attend.  The forum will also be webcast live and recorded for on-demand access after the event.

The FDIC’s notice states that panels at the forum  “will focus on emerging technologies that are transforming banking operations, the impact of emerging technologies on retail banking, including new and innovative delivery channels, enhanced customer experiences, economic inclusion; and consumer financial data access—balancing rights and security.”

It further states that the forum “will bring together representatives from banks that use or are considering using emerging technologies, representatives from firms offering emerging technologies, representatives from bank trade associations, thought leaders on the use of technology in the business of banking, leaders of consumer and community organizations, and representatives from federal and state financial regulatory agencies.”

Earlier this week, by a party-line 34-26 vote, the House Financial Services Committee passed H.R. 4861, a bill seemingly intended to ease restrictions on short-term, small-dollar loans made by depository institutions.  The bill is part of the efforts of House Republicans to provide greater regulatory relief to banks than would be provided by S. 2155, the banking bill passed by the Senate last week.  We expect that Jeb Hensarling, who chairs the House Committee, will attempt to make the bill part of a final banking bill.

H.R. 4861 would nullify the FDIC’s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised depository institutions from offering deposit advance products.  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  We had been sharply critical of that guidance, as well as the OCC’s substantially identical guidance as to national banks.  However, in October 2017,  just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment  loans (CFPB Rule), the OCC rescinded its guidance on deposit advance products.  Because the FDIC has not yet followed suit, H.R. 4861 would remove a regulatory impediment to state-chartered banks and savings institutions offering one form of small-dollar lending to their customers.

H.R. 4861 would require the federal banking agencies to promulgate regulations within two years “to establish standards for short-term, small-dollar loans or lines of credit made available by insured depository institutions.”  The standards must “encourage products that are consistent with safe and sound banking, provide fair access to financial services, and treat customers fairly.”  The regulations would preempt any state laws “that set standards for [such loans or lines of credit]” and would override the CFPB Rule for insured depository institutions that become subject to H.B. 4861 regulations.  (Insured and uninsured credit unions would gain relief from the CFPB Rule even before regulations are adopted.)

Presumably, the “standards” under H.B. 4861 regulations could include interest rate standards.  Thus, federal banking agencies supportive of short-term, small-dollar loans could authorize interest rates higher than the insured depository institutions could otherwise charge under applicable federal law.  Unfortunately, as it is currently drafted, H.R. 4861 could be interpreted to allow the banking agencies to establish rate limits that are more restrictive than the limits that currently apply under federal law.  Accordingly, we would hope that the final bill will clarify that it does allow the federal banking agencies to impair existing rate authority under applicable federal law, including Section 85 of the National Bank Act, Section 27 of the Federal Deposit Insurance Act, and Section 4(g) of the Home Owners’ Loan Act.

 

 

The CFPB has announced that with regard to the collection in 2018 of the expanded data fields under the revised Home Mortgage Disclosure Act (HMDA) rules, the CFPB does not intend to require data resubmission unless data errors are material, and does not intend to assess penalties with respect to errors in the data collected in 2018.

As we reported previously, in October 2015 the CFPB adopted significant changes to the HMDA rules that significantly expanded the amount of information that must be collected and reported, and the institutions that are required to collect and report data. Most of the data collection changes are effective January 1, 2018. In announcing the approach to enforcement, the CFPB acknowledged the significant systems and operational challenges faced by the industry in implementing the changes.

The CFPB also noted that any examinations of 2018 HMDA data will be diagnostic to help institutions identify compliance weaknesses, and indicated that it will credit good faith compliance efforts. This approach was expected by the industry, as it is consistent with the approach taken by the CFPB with the implementation of other significant mortgage rules. The FDIC and OCC also issued similar statements.

Significantly, the CFPB also announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB.  While the industry has pressed for a reconsideration of various requirements, and the Trump administration has signaled it was receptive to considering changes, this is the first public announcement by the CFPB that it will reconsider the revisions made to the HMDA rules.