FDIC Weighs in on Climate-Related Financial Risks
The Federal Deposit Insurance Corporation (FDIC) recently published a notice of proposed policy statement related to what have been deemed “climate-related financial risks.” The FDIC is requesting comments on a set of draft principles which they feel provide a high-level overview of the safe and sound management of climate-related financial risks. Although these draft principles are targeted at the largest financial institutions, meaning those with over $100 billion in assets, all financial institutions no matter the asset size, could have exposures to climate-related financial risks and could benefit from the draft principles. These principles are intended to aid financial institutions in focusing on the management of climate-related financial risks. The comment period for this proposed policy statement is open until June 3, 2022. The FDIC has stated that subsequent guidance will be published on the topic of climate-related financial risks.
What are Climate-Related Financial Risks?
Climate-related financial risks include what are called “physical risks” and “transition risks.” Physical risks refer to the effects on people and property arising from isolated or specific events, such as hurricanes, wildfires, floods, and heatwaves, as well as less easily identified events like shifts in climate, higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks refer to the stress to financial institutions stemming from shifts in policy, consumer and business sentiment, or technologies associated with the changes made in response to the government actions related to climate risks.
Board and Management
A financial institution’s board and management should demonstrate an appropriate level of understanding of the institution’s exposure to climate-related financial risk. The board and management should consider climate-related financial risk exposures when determining the overall business strategy, risk appetite, and financial, capital, and operational plans. The board and management should also address the potential impact of climate-related financial risk exposures on financial condition, operations, and business objectives. The board and management should further consider impacts on the institution’s reputation, LMI and other disadvantaged households and communities. Management should incorporate climate-related risks into policies, procedures, and limits to provide guidance on the institution’s approach to these risks considering the strategy and risk appetite determined by the board.
Institutions should incorporate climate-related financial risks when identifying and mitigating all types of risk, when appropriate. Regarding credit risk, climate-related financial risks should be considered as part of the underwriting and ongoing monitoring of portfolios. The FDIC indicates that effective credit risk management practices could include things like monitoring climate-related credit risks through different analyses and assessing potential changes in correlations across exposures or asset classes. The board and management should also look at credit risk appetite and lending limits related to these risks. The institution should further assess how climate-related financial risks could affect liquidity and incorporate those risks, if necessary, into their liquidity risk management practices.
Institutions should monitor how climate-related financial risks affect their exposure to risk related to changing prices. It has been suggested by the FDIC that bank management monitor interest rate risk and other model inputs for greater volatility or less predictability due to climate-related financial risks. While the industry is conducting research on how best to measure climate price risk, institutions should use the best measurement methodologies available to monitor these risks.
Institutions should consider how climate-related financial risk may negatively impact operations. According to the FDIC, good operational risk management includes assessing all business lines and operations, including third-party operations, and considering climate-related impacts on business continuity. The board and management should further consider how climate-related financial risks and risk mitigation measures affect the legal and regulatory landscape in which the institution operates. This could include possible changes to underwriting considerations related to flood insurance. It could also include fair lending concerns if the institution’s measures affect communities or households on one of the prohibited bases.
Given this and other recent guidance on the subject of climate-related financial risk, this appears to be a sign of things to come. Although this is stated to be aimed only at large institutions, it seems safe to assume that even small institutions will eventually have some role to play and regulations to define that role. Now is a good time for institutions of all sizes to contemplate these climate-related financial risks and begin considering how to prepare for anticipated future changes.
How Many CRA Notices Do We Need?
The short answer is two. For those regulated by the Office of the Comptroller of the Currency (OCC), the answer used to be one, but now it is two. As many of you may remember, the OCC “modernized” their CRA regulations in 2020, changing many requirements. Among these were changes to the public notice, which changed from two notices to one notice. Then, in 2021 the OCC rescinded these modernization changes, and reverted back to the pre-2020 regulations. So, once again, there are two versions of the public notice in the OCC’s CRA regulation. The use of two notices was voluntary for OCC regulated institutions from the time that the rescinding of the CRA modernization final rule was effective, but the use of two notices became mandatory on April 1, 2022. Institutions regulated by either the Federal Reserve Board (FRB) or the Federal Deposit Insurance Corporation (FDIC) were not affected by these changes to the OCC’s regulations, as both FRB-regulated and FDIC-regulated banks have used two public notices for years.
At present, the CRA regulations published by the OCC, FRB, and FDIC regulations are similar in their requirements for financial institutions. In Appendix B of their respective regulations are located both a notice for main offices, and a notice for branch offices. The regulations indicate that institutions must display the main office notice in the lobby of its main office and in each of its branches the institution must display the branch office notice. Additionally, for banks that have branches located in more than one state, what the regulations refer to as an “interstate bank,” at least one branch in each state must display the main office notice in the lobby. For example, if a bank is headquartered in Texas, but also has branches in Texas and Oklahoma, then the main office notice would be displayed at the main office in Texas and in one branch in Oklahoma. All other branches in Texas and Oklahoma would need to display the branch office notice.
To help OCC banks with this mandatory compliance item, Compliance Alliance has created templates for both the Main Office notice, as well as the Branch Office notice, which are available for download on our website. We also have CRA public notices for both FRB-regulated (Main Office and Branch Office) and FDIC-regulated banks (Main Office and Branch Office), but as previously stated, the requirements for non-OCC-regulated banks have not changed. Additionally, our CRA toolkit contains dozens of helpful tools such as policies, procedures, checklists, worksheets and training materials. We’re also available on the hotline to answer whatever CRA-related questions you may have.
Proposed Rule: FCRA & Human Trafficking
Because Acts of Congress often contain provisions unrelated to the main theme of the bill, you may have missed that the Fair Credit Reporting Act (FCRA) was amended as part of the National Defense Authorization Act for Fiscal Year 2022. In response to this change to the FCRA the CFPB published a proposed rule to Amend Regulation V. Comments are due on or before Monday May 9, 2022.
The FCRA was enacted to regulate consumer reporting, to protect consumers by promoting accuracy and fairness in credit reporting, and to prevent inaccurate information in credit reports. The proposed rule would implement the recent amendment to the FCRA and would establish a way for human trafficking victims to identify “an adverse item of information” on their credit reports related to human trafficking so that this adverse information can be blocked, and not included on their credit reports. The proposed rule establishes the procedure for an individual to submit documentation to a consumer reporting agency to accomplish the blocking of human-trafficking-related adverse information.
The proposed rule does not describe what an “adverse item of information” is, as the individual’s circumstances may determine that various items of information are adverse, and indeed it is up to the individual requesting that information be blocked to identify which information is adverse in their opinion.
For instance, “an adverse item of information” could include things such as: creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. In addition, these individuals may want information blocked from their consumer report that are the result trafficking because they do not believe those items accurately reflect them individually. Examples of these adverse items of information include records containing derogatory information reported to a consumer reporting agency on a loan or large purchase, records of coerced debt where a loan is taken out by a trafficking victim under force or threat, records of criminal arrests and convictions, and records of evictions or non-payment of rent.
Although the proposed rule intends to add several definitions to Regulation V, such as “consumer reporting agency,” and “victim of trafficking,” the main discussion in the proposed rule seems to focus on the documentation of adverse information. The proposed rule indicates that the necessary documentation includes part of an official government record, meaning that either 1) Federal, State, or Tribal governmental entities or a court of law has made the determination that the individual is a victim of trafficking, or 2) documentation has been filed in a court of law indicating that an individual is a victim of trafficking. Additionally, the documentation filed by the individual with a consumer reporting agency should identify the items of adverse information to be blocked. Because so much of the information surrounding human trafficking is not documented, the documentation which identifies the adverse items of information may be limited to a statement by the individual, and more tangible evidence is not required.
What the effects will be on banks that are not considered consumer reporting agencies is yet to be seen. The proposed rule doesn’t indicate that banks will have any specific change to their responsibilities in reporting information to the credit reporting agencies, and all potential blocking activity will be done by the agencies themselves.
Fees on the Decline
If there’s one theme to tie together what we’ve been hearing and seeing coming out of D.C. relating to banks, it’s consumer protection. Whether it’s the increased emphasis on Fair Lending, proposed rules in this area or the ongoing campaign against fees.
As to this latest item, the CFPB is at it again, this time calling attention to non-sufficient fund (NSF) fees. In a recent publication the bureau praised large banks which either do not charge or have publicly announced the elimination of NSF fees on checking accounts. It has been estimated that these actions taken by these large banks will save consumers around $1 billion.
The CFPB’s major complaint about NSF fees appears to be that, at least in their view, consumers receive no service at all in exchange for this fee. They further state that NSF fees increase financial distress for consumers, who may also be hit by merchants’ fees for this non-sufficient fund payment attempt. According to the CFPB, NSF fees nationwide average around $34 each, despite the costs to return payments being significantly lower. All told, banks with assets exceeding $1 billion, reported an aggregate of $8.8 billion charged in overdraft/NSF fees. This recent publication further indicated that the CFPB is closely investigating to determine whether charging these fees may be unlawful, and in which situations.
This posting from the CFPB notes that their work on overdraft/NSF fees is part of the larger initiative to save consumers billions of dollars by promoting competition and reducing what the CFPB refers to as, “junk fees.” Be sure to check out the featured article in our March Access Magazine for a more detailed discussion of junk fees and what the CFPB is proposing to do about them.
Now may be the time to evaluate which fees the bank is charging and in which circumstances they’re being charged, to be proactive and get ahead of potential regulatory changes. Industry-wide there seems to be a movement to reduce these types of fees where they’re not being eliminated altogether, such as decreasing from $35 to $25, $15, or even $5 (as we’ve heard anecdotally).
Although increases in fees for deposit accounts require advance notice before the changes are effective: 21 days under Regulation E and 30 days under Regulation DD, you’re not required to give notice to your customers when fees decrease. You may give notice to your customers in the instance of fees being reduced, as there is no prohibition in giving a notice when not required in this situation. If you choose to give notice, you may do so however you’d like: a statement message, a separate letter mailed in the same envelope with statement, a separate letter mailed by itself, a notice in online banking, or any other method of communication already authorized by your customer.