April 2024 Newsletters

FDIC Signs Receive 21st Century Update

In your average day, I would guess you rarely think about FDIC signage. Sure, it comes up with advertising, but beyond that, is it ever top of mind? Because of that, it was easy to gloss over the effective date of a new rule on April 1. Before I get any further, let me ease any worries that the last sentence may have invoked. The mandatory compliance date is January 1, 2025, so if you glossed over it like many others, there is still time to correct it. The FDIC says that the “…extended compliance date is intended to provide sufficient time for financial institutions to put in place processes, systems and technological updates to implement the new regulatory requirements…”

Last December, the FDIC finalized amendments to its rules on official FDIC signage, bank advertisements, deposit insurance misrepresentations, and the misuse of the FDIC’s name or logos. The FDIC aims to modernize the rules for digital banking services through these amendments. Critical provisions for federally insured banks include:

  • New FDIC Digital Signage: The amendments create a new official digital sign for the FDIC and address how banks must display it on ATMs and other remote deposit electronic facilities. They also establish a set of rules for the display of the new official digital sign in a bank’s “digital deposit-taking channels.” The regulations require the official digital sign to be continuously and conspicuously displayed on specific pages or screens in a bank’s digital deposit-taking channels.
  • Modernizing FDIC signage on Physical Premises: The amendments modernize rules on displaying the FDIC official sign on physical premises where consumers have access to or transact with deposits beyond the traditional teller window.
  • New Shorthand for the Official Advertising Statement: The rule changes permit banks to use “FDIC-Insured” in addition to “Member FDIC” as a shortened version of the official advertising statement, “Member of the Federal Deposit Insurance Corporation.” The complete or shortened versions of the official advertising statement must appear in certain bank advertisements.
  • Separating Non-Deposit Products: The FDIC created new provisions to help consumers understand when a product is a deposit product covered by FDIC insurance and when a product is a “non-deposit” product. The amendments identify situations where banks may not offer deposit and non-deposit products near each other and when banks are permitted to provide deposit and non-deposit products in the same channel. The new rules require banks to provide certain disclosures regarding the non-deposit product.
  • Policies and Procedures: Under the new rules, banks must establish and maintain written policies and procedures to address compliance with Part 328. Notably, the policies and procedures must include provisions related to monitoring and evaluating activities of certain third parties that provide deposit-related services to the bank or offer the bank’s deposit-related services to others.

You may find our summary of the rule useful. If you have any questions, please feel free to reach out to the Compliance Alliance hotline for assistance.

Bothersome Bonds in Texas

Government bonds are considered a “safe” investment. Being less risky than stocks and loans, they are often a part of most banks’ portfolios to manage economic risk. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date and to pay you periodic interest payments along the way. If the issuer repays the bond early, you lose out on those periodic interest payments, but that is not typically a concern with government bonds. A situation unfolding in Texas, however, showcases that this is not always the case.

Texas bankers are urging the Texas Transportation Commission to rethink a plan to pay off a $300 million bond issued in late 2020, more than nine years ahead of schedule, at a time when that initial investment has some bond buyers losing money on the purchase. If paid off early, potentially at the end of April, the state could save roughly $80 million, but the banks that bought it would absorb that loss. The motivation for the early bond repayment comes from the Texas Department of Transportation’s significant financial uptick due to federal infrastructure funding and higher state revenues. Despite these economic benefits for the state, local banks stand to lose out on the foregone interest income—a situation that could discourage future investment in state projects.

The savings from paying the bonds early comes at a cost for the banks that bought the bonds. Assured of their stability at the time—and given Texas’ long record of paying its debts—the banks grabbed the bonds, thinking they would make a safe and sound long-term investment. Now, that situation has changed. As interest rates have risen sharply since 2020, inflation has meant money doesn’t go as far as it once did, and their long-term profit is eliminated by the state paying the principal sooner. While each bank’s investment loss may seem minuscule when compared to the state’s overall savings, it still economically affects the state by costing local banks capital they would otherwise invest back into their local communities.

This story is not an attempt to dissuade anyone from future bond investments, but it is an important lesson. It is important that the Bank pays attention to trends within their local communities and nationwide as it relates to investment risks. When selecting investments, particularly bond portfolios, the bank needs to be aware of all contractual requirements within the prospectuses and is appropriately stress testing the rate of risk, which includes option risks where the timing of the call on the bond may have a huge impact on the bank. Historically, many banks have not had to consider early repayment and calling of bond risks. Just another part of asset and liability management.

Legislative Update: Part 2

I’m sure everybody reading this has been sitting on pins and needles, waiting for Part 2 to drop. Well, your wait is over! The following are more key legislative updates you need to know about.

Durbin Amendment: You are probably familiar with the Durbin Amendment. It passed as part of the Dodd-Frank Act and it requires all banks to provide merchants with two unaffiliated debit networks in certain situations, and it caps interchange on debit card transactions for banks with more than $10b in assets. Regulation II implements those statutory requirements. The Credit Card Competition Act of 2023 (CCCA) would require banks with more than $100B in assets to offer merchants multiple credit card processing networks from among a list of networks determined by the Federal Reserve, not the card issuer. That is a high threshold, but it is easy to see the effects of this rule trickling down and impacting small banks as merchants shift transactions onto less secure networks and credit card rewards are gutted. Foreseeably credit card fee income may drop for even smaller banks due to competition with other networks subject to the rule who are required to drop fees. The amendment has not yet passed, so there is still time to urge your member of Congress to oppose the CCCA if you so choose.

Digital Assets: The digital asset market includes a range of instruments from speculative and volatile cryptocurrencies to “stablecoins” backed by a collection of assets to digital representations of customer bank deposits on a blockchain. Each category of digital asset has a unique risk profile. There is no comprehensive regulatory framework that establishes guidelines for risk management and consumer protection in the digital asset market. In July, the House Financial Services Committee passed two digital asset bills out of committee, and both are pending action on the House floor. One broadly establishes a regulatory framework for digital asset companies, and the second establishes a regulatory framework for stablecoin issuers.

Overdraft: You are likely familiar with the CFPB’s proposed rule imposing additional restrictions on overdraft protection services as part of its effort to reduce or eliminate fees that it labels “junk fees.” The proposal would apply the Truth in Lending Act (TILA) and Regulation Z requirements to overdraft protection services offered by banks and credit unions with assets of more than $10B that charge an overdraft fee above a certain dollar threshold. An institution would be exempt from this application of Regulation Z only if it charges a “true courtesy” fee using one of the two calculations: (1) a fee that reflects the institution’s “breakeven” costs, including charge-off losses, to operate its overdraft program; or (2) a fee that conforms to a “benchmark” fee set by the CFPB. The Bureau has proposed $3, $6, $7, or $14 as potential benchmarks. The CFPB ceased accepting comments earlier this month and it remains to be seen if a final rule will be issued.

Legislative Update: Part 1

In our profession, we’re constantly looking toward what’s next. We’re not necessarily looking forward to what is next in a jubilant way, but our eyes are metaphorically looking forward, and we’re preparing accordingly. The following are some key legislative updates from D.C. on their way to banks across the country.

1071: Early last year, the CFPB issued a final rule to implement section 1071 of the Dodd-Frank Act, which requires lenders to collect and report information about lending to women-owned, minority-owned, and small businesses to the CFPB. The purpose is to facilitate the enforcement of fair lending laws and community development efforts. The rule applies to lenders making at least 100 small business loans in the two preceding calendar years. Covered lenders will have to report 81 data fields on each covered transaction, which will substantially burden existing procedures. The compliance dates have been delayed for all financial institutions while the rule is being challenged in federal court. We anxiously await the Supreme Court’s ruling, which is generally expected to be released two to three months from this writing.

Cannabis Banking: Marijuana-related rules are a constant headache for banks. Currently, 38 states have legalized cannabis for medical purposes, and 24 states have approved adult use, but federal law remains the same: it is an illicit, illegal substance. For banks, that means that any proceeds generated by cannabis-related businesses are unlawful, even if the proceeds flow from legally operated businesses at the state level. Currently, Congress is debating the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which has passed the Senate Banking Committee with bipartisan support. The House has passed the SAFE Banking Act multiple times in previous Congressional sessions. Formal implementation of either bill would allow banks to serve cannabis-related businesses legally, so we’re currently in the same holding pattern we’ve been in for years: waiting for congressional action from both houses of Congress.

CRA: As we previously covered, certain parts of the new CRA rule were due to go into effect on April 1st, but the agencies issued a last-second interim final rule delaying implementation of the new public file and facility-based assessment areas rule until the rest of the rule goes into effect: January 1, 2026. The new rule represents a significant regulatory shift and may ultimately reduce access to credit for mortgages, small business loans, and community development financing. It dramatically expands what constitutes a “community” where regulators will evaluate CRA performance. Even with a delay, and new litigation in this area, many are continuing with their preparations just the same.

Data Aggregation (1033): Data is ubiquitous. It has an ever-increasing role throughout the world, including banking. Section 1033 of the Dodd-Frank Act gives consumers the right to access their financial records in a standardized electronic format, with some exceptions, in a push towards “open banking.” The CFPB issued a proposed rule in October 2023, implementing Section 1033. Per the rule, banks will be covered data providers who will have to provide customers with their data upon request generally and will have to give access to authorized third parties with whom customers decide to share their data. It represents a significant shift in the way banks will handle customer data. The CFPB has indicated that a final rule should be released this fall.

More to come next week!