Preparing for a Year of Significant Regulatory Change

Posted by Paul Davis on Dec 7, 2023 11:17:00 AM


Financial institutions must be ready for a bevy of new regulations in 2024.

All major federal bank regulators (the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, the Federal Reserve, and the Consumer Financial Protection Bureau) have sought comments for proposed rules during the second half of this year. They cover many topics, including corporate governance, capital, liquidity, and artificial intelligence.

As we head into the final weeks of 2023, it's an ideal time to break down the looming changes and highlight critical dates for comments or implementation.

Artificial Intelligence (AI)

On September 19, the CFPB issued guidance to address AI-powered credit denials. It wants creditors to show the actual reason for denying credit, citing lenders' increased use of advanced algorithms and personal consumer data during underwriting.

The following month, President Biden signed an executive order setting AI standards. It requires "developers of the most powerful AI systems" to provide the government with safety test results and other important data. It also pushes for standards, tools, and tests to help ensure the safety and security of AI systems.

Capital Requirements

The Fed, OCC, and FDIC are seeking comments on a plan to change the level of capital banks must hold based on their risk profile. The requirements would apply to banks with at least $100 billion in assets. The agencies extended the deadline to January 16 as they gathered more data from banks that the proposal would impact.

The same agencies extended the comment period on a proposal to place long-term debt requirements on large banks to January 16. That proposal would require banks with more than $100 billion of assets to issue more long-term debt in hopes of improving resolutions of failed banks.

Community Reinvestment Act (CRA)

The Fed, OCC, and FDIC issued a final rule on October 24 to overhaul the CRA. It would redefine the criteria for small (less than $600 million of assets), intermediate ($600 million to less than $2 billion), and large banks ($2 billion or more) and incentivize banks to pursue more community development. The update, which will go into effect on January 1, 2026, will introduce evaluation tests based on loan activity rather than branch locations.

Contingency Funding Plans

The Fed, FDIC, OCC, and the National Credit Union Administration issued updated guidance on how depositories should "regularly evaluate and update their contingency funding plans." It covers topics such as the Fed's discount window and emergency borrowing.

Corporate Governance

On October 3, the FDIC issued proposed guidance directing banks with more than $10 billion of assets to create and promote corporate governance principles to ensure safe and sound operations and compliance with regulations and consumer protections. The FDIC recently extended the comment deadline to February 9, 2024.

Debit Card Interchange

On October 25, the Federal Reserve proposed lowering the cap on interchange fees for debit card transactions. The proposal would reduce the fixed fee component from 21 cents to 14.4 cents and the variable component from 5 basis points of the transaction value to 4 basis points. There will be a 90-day comment period on this controversial change that could impact many institutions nationwide.

Consumer Data & Open Banking

The CFPB is giving banks and credit unions with more than $10 billion of assets until February 1, 2024, to stop charging customers "unreasonable" fees for basic account data. An advisory opinion pointed to fees tied to consumer inquiries about deposit account balances and the amount needed to pay off loans, among other things.

Separately, the CFPB began seeking comments in October on a proposal requiring financial firms to share more data at a customer's request—opening the door for open banking applications. Authorized third parties, including competing financial institutions, could receive access to the data. The proposal would have specific obligations for those third parties, including privacy protections. Comments are due by December 29.

Nonbank Oversight

The CFPB issued a proposal to let it supervise larger nonbank companies that offer services such as digital wallets and payment apps. Under the proposal, companies that handle over 5 million transactions annually would be subject to the same rules as big banks, credit unions, and other CFPB-supervised financial institutions. Comments are due by January 8, 2024.

Resolution Plans

The FDIC's proposed rule to update resolution plans would require banks with over $50 billion of assets to report certain data about their 100 biggest depositors, such as their names, business lines, and geographic information.

The Bottom Line

What should you do if you think you'll be impacted by any of the above regulatory matters? It is important to provide the comment letters requested by regulators and work with your trade associations on a coordinated response. Make it clear how a proposed rule would negatively impact your operations or influence the competitive landscape. Be ready to provide data and other supportive documents.

You should also prepare now, as some of the above changes will come to pass. Evaluate any potentially impacted operations to determine what changes would be necessary to adjust and comply. Would you need to change policies or procedures? Hire additional talent? Find out now. Talk to your examiners to understand anything else you should do to prepare. A proactive approach could help you set your feet when changes are mandated.

Topics: Vendor management, AI, Artificial Intelligence, Deposits, Regulation, liquidity, Corporate Governance, Capital

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