January 2024 Newsletters

Beneficial Ownership Made Accessible

Happy New Year!

Starting January 1^st, most companies created in or registered to do business in the United States had to start reporting beneficial ownership information (BOI) to FinCEN. This reporting requirement is the first of three rules intended to implement the Corporate Transparency Act (CTA). The rule has been expected for quite some time but one of the questions that’s been on all of our minds is “when and how will banks be able to access that information?” Well, we at least have part of the answer to this now. Under the second of these three expected rules, which was issued at the end of 2023 (the “Access Rule”), FinCEN will start providing access to its beneficial ownership database.

Information collected by FinCEN from BOI reports will be kept in a nonpublic database called the “Beneficial Ownership Technology System.” Only “authorized recipients” are permitted database access. Financial institutions subject to customer due diligence requirements are one category of authorized recipient. The Access Rule does not create a new regulatory requirement for banks to access BOI from the database, so it does not necessarily require changes to Bank Secrecy Act (BSA)/anti-money laundering (AML) compliance programs designed to comply with the existing Customer Due Diligence rule (the “current CDD Rule”). For the moment, it is business as usual but soon you will have the ability to access FinCEN’s database. The prerequisites for access in part are that you must obtain the reporting company’s consent prior to access and “develop and implement administrative, technical, and physical safeguards reasonably designed to protect the information” accessed.

FinCEN is taking a phased approach to providing database access. The first stage will be a pilot program for only a handful of Federal agency users starting in February. The second stage will extend access to Treasury offices and certain Federal agencies engaged in law enforcement and national security activities. Subsequent stages will extend access to additional Federal agencies engaged in law enforcement, national security, and intelligence activities, as well as to State, local, and Tribal law enforcement partners; and finally, to financial institutions. At the moment, there is no indication of how long it will be before we reach the financial institution phase so while implementation begins in February, bank access will likely begin a few months later at best.

The third of the three CTA implementation rules, which has not yet been proposed, will revise the current CDD Rule. In particular, the CTA directs FinCEN to revise the current CDD Rule to, among other things, account for banks’ access to the BOI database. At the moment, your current CDD requirements remain the same and your impending access to the BOI database does not alter your CDD needs, but that is at least expected to change. How the CDD rule will change is anyone’s guess at the moment. On that front it is still more “wait and see.”

CFPB Issues New Opinions on FCRA

Earlier this month the Consumer Financial Protection Bureau (CFPB) issued two new advisory opinions on background screening and file disclosure. The opinions are part of the CFPB’s ongoing efforts to clean up credit reporting practices and ensure credit report accuracy and transparency.

Background Checks

First, the CFPB addresses the provision of background check reports. These reports often contain information compiled from several sources about a consumer’s credit history, rental history, employment, salary, professional licenses, criminal arrests and convictions, and driving records. As a rich source of individual information, background checks are often used in processing rental or employment applications while consumers have few means to ensure their accuracy outside of frequent and active monitoring.

The advisory opinion highlights Section 607(b) of the Fair Credit Reporting Act (FCRA) which requires that credit report agencies (CRAs) “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” A CRA must have reasonable procedures in place to “assure maximum possible accuracy.” Specifically, per the advisory opinion, a CRA’s procedures should:

1. Avoid the reporting of duplicative information;
2. Prevent the reporting of public record information that has been expunged, sealed, or otherwise legally restricted from public access; and
3. Guarantee the inclusion of any disposition information if it reports any arrests, criminal charges, eviction proceedings, or other court filings.

The advisory opinion goes on to remind CRAs that there is a time limit on reporting most negative items. Outdated negative information, such as a criminal charge that does not result in a conviction, for periods longer than permitted under FCRA section 605(a) may not be reported. While no time limit applies to reporting disposition information on criminal convictions, an arrest with no conviction ends seven years after the arrest date and subsequent events do not restart the reporting period applicable to the arrest.

CRA File Disclosure

In the second advisory opinion, the CFPB addresses CRA disclosure responsibilities to deliver complete files to consumers upon request. In the opinion, the CFPB clarifies that CRA’s must act upon request to “clearly and accurately” disclose “all information in the consumer’s file at the time of the request.”

Specifically, a CRA must provide consumers the following:

1. At least one free file disclosure annually and in connection with adverse action notices and fraud alerts;
2. Consumer’s complete file with clear and accurate information presented in a way an average person could understand and a format that will assist consumers in identifying inaccuracies and exercising their rights to dispute any incomplete or inaccurate information; and
3. All sources for the information contained in consumers’ files so consumers can identify the source and correct any misinformation.

For banks, these opinions may not have a direct application, but credit reports are regularly used in the customer intake process and the above should give context as to what’s going on behind the report and may help you or may help you assist customers with any issues with a CRA. Please feel free to reach out to us on the hotline with any additional questions you may have.

The New Push to Reduce Interchange Fees

When you need to pick up the tab, how do you pay? For many Americans the answer is their debit card. Debit cards are the most popular form of noncash payment and, for many banks, that makes interchange fees (fees paid between banks for the acceptance of card-based transactions) a key source of revenue. A revenue source that may now be at risk. The Federal Reserve Board proposed a new rule that would considerably lower the interchange fee cap that debit card issuers may charge a merchant’s bank (an acquiring bank) for processing debit card transactions.

Under the current rule, each interchange fee received by a debit card issuer for a debit card transaction can be no more than the sum of 21 cents plus a small ad valorem component keyed to the amount of the transaction and a fraud prevention adjustment. The proposed rule would lower the cap of the base component to 14.4 cents per transaction. To make sense of those numbers here is an example of what that means for a $50 debit card transaction. Under the proposed rule, the maximum permissible interchange fee for a $50 debit card transaction would be 16.4 cents (plus a potential fraud adjustment), down from 23.5 cents under the current rule. Applying the change to one transaction makes it look like no big deal. It’s seven cents. For the market as a whole, this could mean billions of dollars.

In addition to lowering the interchange fee cap the proposed rule would also institute automatic adjustments to the cap every other year based on data collected in a survey of large debit card issuers. These updates would not be subject to public comment with updated caps taking effect in July of those years and remaining in effect for two years. So, once (and if) the proposal rule goes into effect, there will be rolling adjustments not subject to bank comment in odd-numbered years.

Lastly, a bit of “good” news for smaller institutions. To the relief of many, the proposed rule leaves an exemption in place for “small issuers,” defined as debit card issuers with assets of less than $10 billion. With that noted, however, small issuers do not exist in a vacuum, and they may see their revenues impacted by downward fee pressures in the interchange market.

The Board’s stance is that the proposal would primarily impact merchants by lowering their costs of accepting debit card transactions while decreasing revenue for debit card issuers. The proposal would generally decrease the interchange fee paid by an acquirer on an average transaction performed using a debit card issued by a covered issuer, which would in turn decrease a merchant’s costs by decreasing the merchant discount that the merchant pays to its acquirer for a debit card transaction and, hopefully, these savings would be passed on to their customers and reduce costs.

There is, however, anecdotal evidence that we are already seeing the reverse effect with merchants either up-charging or offering a discount of 3-4% in some cases for cash payments. The impact of the proposed rule across the payments ecosystem may also be exacerbated by the Board’s recent revisions to debit card transaction routing rules for card-not-present transactions. In any case, if there is a shift towards cash payments, that may shrink the interchange fee market and any debit card issuing bank’s piece of the pie, in addition to other potential risks associated with cash transactions. The proposed rule’s comment period ends on February 12^th.1

Don’t Forget About Your Assets

Lending is a risky business. Of course, that’s why you do your best to evaluate applicants to reduce the risks you take on as an institution. Asset quality is one of the most critical factors in determining a bank’s health. The quality of your loan portfolio has a substantial effect on asset quality as loans are ordinarily the largest bank-held asset and carry the greatest amount of potential risk to capital.

Asset quality at the customer level is what we think of as underwriting and ability-to-repay requirements. This is looking at the fundamentals of each credit, including, at a minimum:

• the overall financial condition and resources of the borrower;
• borrower credit history;
• the borrower’s character;
• the purpose of the credit relative to the source of repayment; and
• the types of secondary sources of repayment available, such as guarantor support and the collateral’s value.

When assessing asset quality you’re reviewing the totality of the loan portfolio and other assets and classifying its risk as a whole. When a bank makes a significant number of loans that cannot be repaid, this would expose the bank to higher write-offs and, in turn, erode earnings and capital. Because of the importance of asset quality—especially for a community bank—examiners pay close attention to the distribution, severity, and trend of poor-performing assets. When reviewing asset quality, one of the first considerations will be risk management practices of the bank, including:

• the ability of personnel to monitor, manage and control risks under current and stressed market conditions;
• internal review processes that help catch problems;
• policies, procedures and risk limits that guide lending decisions and are reflective of risk appetite; and
• active monitoring of credit quality accompanied by actions taken to address any weaknesses.

Examiners then test bank processes by reviewing a statistical sample of assets. These reviews are central to any exam, but asset quality ratings also depend on the level of funds from earnings that are redirected to cover potential or known losses on assets, which is now calculated pursuant to the CECL methodology. Without going into detail on CECL, examiners review your processes—making sure they are proportionate to the level of credit risk in the portfolio—and the methodology used to determine them. When loans go bad, the bank forecloses, and any losses are offset by the reserve.

Examiners also consider asset concentration, such as unusually high volumes of lending in commercial real estate. Losses from unexpected changes in economic or geographic conditions are heightened when concentrations exist.

For community banks—where loan portfolios are the primary bank asset—good lending practices are essential but sound asset quality practices ensure community banks remain diligent and protect themselves against market pressures and post-consummation lending issues. Please feel free to reach out to us on the hotline with any additional questions you may have.