#2023-11, May 26, 2023

CFPB’s Final Rule on Section 1071 Entangled in Litigation

In late April, our colleagues at the Texas Bankers Association (TBA) sued the Consumer Financial Protection Bureau (CFPB) over its final rule implementing Section 1071 of the Dodd-Frank Act (DFA).  As you know, this rule requires the collection and submission of data related to credit applications by women-owned, and minority-owned small businesses.  The central argument in Texas Bankers’ claim emphasizes that the final rule goes well beyond the 13 data points specific in DFA.  Further, the plaintiffs contend the significant reporting requirements will force community banks out of small business lending altogether, which would clearly harm small businesses that are vital the U.S. main street economy.

In the past week, the American Bankers Association (ABA) announced that it joined the TBA and Texas-based Rio Bank lawsuit.  Speaking at the TBA Annual Convention, ABA President CEO Rob Nichols said, “We are pleased to join the TBA and Rio Bank in this important legal effort to rein in an agency that has consistently sought to stretch and exceed its statutory powers.  We are fighting this rule because it will make it harder – and not easier – for banks to serve the underrepresented communities it is supposed to help.

We cannot project a potential outcome for the litigation today, but we would advise member banks here in the Commonwealth of Massachusetts to monitor this case closely in conjunction with our continued outreach efforts.  As the case moves through the court system, it is possible that compliance deadlines in the rule and, potentially, the final rule’s validity and enforceability could be impacted.

Of note, the Association will host a webinar with Carl Pry of Treliant Risk to discuss the CFPB’s Final Rule on Section 1071, and we will cover the full implications of the litigation discussed above, as well as components of the final rule that community and regional banks should focus on starting today.  This webinar will be hosted on July 11, 2023, please mark your calendars.  Registration will open in early June.

Please read about the TBA and Rio Bank lawsuit further by clicking here, including the complaint text.

OCC Releases Revised Policy and Procedures Manual on Bank Supervision

The Office of the Comptroller of the Currency (OCC) on Thursday May 25^th released a revised manual on bank supervision that discusses the actions the OCC may take against banks demonstrating “persistent weaknesses”.  While Appendix C focuses on larger and more complex financial institutions in the United States, the agency clearly notes that “it may apply this framework, including the restrictions discussed… to any bank.”  Persistent weaknesses are defined within the update to include “composite or management component ratings that are ‘3’ or worse, or three or more weak or insufficient quality of risk management assessments, for more than three years.”  The updated manual is a useful data point for all banks operating in the Commonwealth to prepare for pending safety & soundness examinations.

Finally, the OCC updated its Liquidity Booklet, that provides their examiners with guidance on assessing the quantity of a bank’s liquidity risk and the quality of liquidity risk management at an examined institution.  The booklet’s changes reflect updated regulations, recently published OCC issuances and clarifying edits.

To review the revised manual on bank supervision, please click here.
To read and review the Liquidity Booklet, please click here.

Political Stalemate on Debt Ceiling Negotiations Persists, MBA and State and National Associations Urge for Deal Without Haste

While there are signs that negotiations for raising the nation’s debt limit are gaining momentum, members of Congress will leave Washington D.C. for Memorial Day weekend with no deal.  House lawmakers will be given 24 hours’ notice to return if a deal is reached between House Speaker Kevin McCarthy (R – CA) and President Joe Biden’s administration.  For months, House Republicans have insisted on certain spending cuts before they agree to raise the nation’s debt ceiling, whereas Democratic lawmakers continue to argue these cuts address money that Congress already spent, so the ceiling should be raised without contingencies to avoid an embarrassing and potentially economically disastrous default.

Any deal announced by the key negotiators involved in talks must pass both the House and Senate.  The President and his team have largely kept the Democratic-controlled Senate in line throughout all negotiations during the President’s time in office, but it remains to be seen whether a deal with the House Speaker will receive an immediate vote and passage in the Senate.  As we also have experienced, the Speaker’s control over his Republican colleagues in the House can be fickle, so questions remain about House Republicans coalescing around the final deal McCarthy and Biden strike.

It is imperative that the full United States Congress and the Biden administration strike a deal as soon as possible.  Any default of any type would have significant economic consequences.  A default lasting a day or two would still likely roil financial markets.  A prolonged default would have unclear repercussions that all US consumers and businesses would strongly prefer we avoid.