SDBA eNews

August 8, 2019

Consumer Credit Growth Decelerates in June

Consumer credit increased at a seasonally adjusted annual rate of 4.3 percent in June. Total outstanding credit increased $14.6 billion during the month to $4.10 trillion.

Revolving credit, largely a reflection of credit card debt, decreased at an annual rate of 0.1 percent to $1.07 trillion, following an 8.4 percent increase in May. Non-revolving credit rose at a 5.8 percent annual rate, or $14.7 billion. Total non-revolving credit is now $3.03 trillion.

Federal government holdings of student loans continue to be the largest portion of non-revolving credit, comprising approximately 42.2 percent of outstanding credit. Depository institutions and finance companies are secondary and tertiary holders, with 25.1 percent and 16.8 percent, respectively, of outstanding non-revolving credit. Read the Fed release.

Stewart Op-Ed Tackles 'Troubling Trend' of Credit Unions Buying Banks

The accelerating trend of credit unions acquiring banks “means fewer businesses contributing to the tax base supporting our communities,” wrote American Bankers Association Chair-Elect Laurie Stewart in a Puget Sound Business Journal op-ed today. Stewart’s op-ed came less than a week after the 11th credit union acquisition of a bank was announced in 2019 — two more than the nine deals that were announced in all of 2018.

Stewart’s op-ed documented the cost the credit union tax exemption has on other businesses. In Washington state, 44 types of service businesses — including banks — saw a 20% tax hike to support higher education, on the theory that these businesses employ more college-educated workers. “But credit unions, with a similar workforce to commercial banks, won’t pay these new taxes to support Washington’s colleges and universities,” Stewart explained. “If your business is in one of the categories facing higher business and occupation taxes, you’re paying more simply because credit unions pay nothing. If they paid business taxes at the same rate banks do, it would add tens of millions annually to the state treasury. That number — the amount the rest of us pay subsidizing them — will only grow as they acquire more taxpaying financial institutions.”

“A recent [ABA-funded] study by Federal Financial Analytics found that modern credit unions are ‘indistinguishable’ from tax-paying financial institutions,” added Stewart, who is president and CEO of Sound Community Bank in Seattle, which itself converted from a credit union in 2003. “Credit unions continue to aggressively push for the authority of commercial banks. They should be required to step up to all the responsibilities that come with it.”

CFPB: Alternative Data Could Increase Availability, Lower Cost of Credit

The use of alternative data in credit decisions could make a significant difference in the cost and availability of credit for consumers, according to a new blog post published yesterday on the CFPB’s website. The blog post highlights data submitted to the bureau regarding outcomes generated by using an underwriting and pricing model incorporating alternative data—such as information about borrowers’ education and employment history—created by the Upstart Network. Upstart has been operating under a no-action letter from the CFPB to develop and test the model since 2017.

When comparing outcomes between a traditional model and the one that incorporated alternative data, Upstart found that using alternative data increased acceptance rates by 23% to 29% across all tested race, ethnicity and sex segments, while decreasing average APRs by 15% to 17%. Individuals that were considered “near prime” (with FICO scores between 620 and 660), younger applicants under age 25 and consumers with incomes of under $50,000 were significantly more likely to be approved under the tested model.

Fair lending testing showed no disparities between the traditional model and the tested model with regard to the approval rates and APRs provided for minority, female and senior borrowers, the CFPB added.

Trade Associations Weigh In on Changes to FTC's Safeguards Rule

As the Federal Trade Commission considers making changes to its existing standards for safeguarding customer information, ABA last week joined two other industry groups in a comment letter urging the commission to harmonize the changes with existing data protection rules. The association called on FTC to ensure that the updated rule—which would expand the requirements for companies under the FTC’s jurisdiction that collect and share customer data—aligns with FFIEC interagency guidelines, IT examination handbook and other supplementary guidance.

“Such harmonization will optimize cyber professionals’ time on frontline defense versus reconciling another topically similar, but semantically different regulatory regime, increase consumer understanding concerning the protection requirements for their data, and ultimately result in greater security across the entire ecosystem,” the groups wrote.

The associations also urged the FTC to map the revised rule to the FSSCC Cybersecurity Profile, rather than using the New York Department of Financial Services’ cybersecurity regulations and the NAIC model law as a baseline.

Banks Report Stronger Residential Mortgage Demand

The second quarter saw substantially stronger demand for residential mortgage loans, according to the Federal Reserve’s latest senior loan officer opinion survey released today. More than half of banks reported stronger demand for GSE-eligible mortgages, and at least one in three banks said demand was higher in every other mortgage category: government; Qualified Mortgages that are jumbo or non-conforming; non-QM jumbo loans; non-QM and non-jumbo; and subprime. A small net percentage of banks tightened standards on conforming loans, while small handfuls of banks on net eased loan standards in the other categories. On net, banks neither tightened nor eased on QM jumbo and subprime mortgages.

Meanwhile, small net percentages of banks reported easing standards and terms for loans to large and midsize firms in the previous quarter, while a slightly larger percentage eased standards for small businesses. Banks that tightened cited the economic outlook, industry-specific problems and reduced risk tolerance as major factors. Nearly all banks that eased cited more aggressive competition as a somewhat or very important reason. Net percentages of banks reported weaker business loan demand from both large and small firms driven by decreasing capital investments and a decline in M&A financing needs.

A long-running trend toward tightening on commercial real estate loans continued, with modest net percentages tightening across all CRE categories. Banks reported moderately weaker demand for CRE loans, with the exception of multifamily loans. Standards for home equity lines of credit remained largely unchanged even as about a quarter of banks reported weaker demand. About 8.5% of banks reported tightened standards on credit cards, while on net 3.5% said they tightened standards for car loans and 9.3% said they tightened standards on other consumer loans. Double-digit percentages reported stronger demand for credit cards and auto loans.

Fed to Offer Its Own Faster Payments Service

In a long-awaited decision, the Federal Reserve today announced it would develop FedNow, its own 24/7/365 real-time settlement service to compete with the bank-built, private-sector RTP network. The Fed’s service will conduct real-time, payment-by-payment, final settlement of interbank obligations through debits and credits to banks’ balances in accounts at the Federal Reserve banks, Fed Governor Lael Brainard said today in a speech announcing the decision in Kansas City, Mo.

The Fed said it does not expect FedNow to be available until at least 2023 or 2024. “ABA has been a strong advocate for real-time payments in the U.S., and we believe every bank in the country and their customers will benefit from a seamless and ubiquitous system,” commented American Bankers Association President and CEO Rob Nichols. Nichols said he hoped the Fed’s decision will help “speed” the nation’s transition to real-time payments, while adding that “the reality is that any Fed-built system will still take some time to build, so in the meantime ABA will continue to encourage all banks to embrace the future and consider whether to connect to the existing Real-Time Payments network offered by the Clearing House.”

While the Fed said that interoperability with other real-time payments networks—namely the Clearing House’s RTP network—would be “a desirable outcome,” it did not commit in its notice to make FedNow interoperable with other networks, which is a capability that ABA has said would be critical to the success of real-time payments in the U.S. “We believe any Fed system must be fully interoperable with the RTP network, remain accessible only to chartered financial institutions, and be available through all core processing companies and without volume discounts that disadvantage smaller banks,” said Nichols.

As the Fed moves ahead with FedNow, Nichols also called for the creation of the liquidity management tool the agency proposed last fall, which he noted would “help financial institutions manage fund balances used to settle faster payment transactions regardless of whether they travel on existing faster payment rails or on any news solution.” He also urged the Fed to use its role as a market regulator to prod core processing companies to help banks quickly connect with real-time payments providers. Comments on the Fed’s notice—which also seeks feedback on expanded hours for the Fedwire Funds Service and the National Settlement service—are due 90 days after it is published in the Federal Register.

Bankers Discuss Lessons Learned on Mobile Banking

Although mobile banking is only a little over a decade old, it has evolved rapidly in response to changes in technology and customer feedback. A new article on ABA Bank Marketing gathers insights from banker experience and industry research on how best to drive mobile adoption while keeping customers satisfied.

Lessons learned in mobile banking fall into three main themes: balancing mobile and personal interactions; mastering the art of the gentle “nudge”; and shifting the mobile focus from transactional to service features. Budgeting tools and AI-powered automated savings are among the latest offerings that show promise with customers.

Instead of replacing employee-customer interactions, the author writes, the best mobile banking apps deepen those relationships. Read the article.

Article Links Bank Differentiation to Financial Health Programming

Financial services pundits and educators have long puzzled over how best to improve financial health among American consumers. Along parallel lines, bankers have sought ways to deepen customer relationships and differentiate in an increasingly commoditized industry. A new article on ABA Bank Marketing delves into the latest research to connect the dots between an urgent consumer need and behavior-inducing financial technology.

At the core of the issue is what a recent study by Ernst and Young calls the “financial health paradox”—when consumers perceive themselves as being financially healthy even though they are not. “Helping consumers improve their financial health and thrive is one of the major emerging trends in consumer financial services,” writes Mark Gibson of Capital Performance Group. “Clearly, though, we need to do it in new ways that are more effective.”

Using insights from behavioral economics, Gibson identifies the financial wellness strategies that work—and those that don’t. He also surveys the emerging technologies most likely to make a difference in consumers’ lives. Banks “already have the client relationships, data and trust,” Gibson writes. “Building upon that strong foundation, a digital financial wellness platform could just be the next 'killer app' in personal finance.” Read the article.

Compliance Alliance

Question of the Week

Question: We have a commercial loan transaction where the borrower is purchasing a commercial building and repurposing it into 18 residential condos. Is this loan HMDA reportable?

Answer: Unfortunately, the regulation does not specifically address the situation of a non-residential building is being converted to a dwelling after consummation. While there is an argument that this is not a "dwelling" at consummation, in grey areas, we'd generally interpret that it's more conservative to report than not. So the bank may choose to report this to be on the safe side, but whichever way it chooses, it should document its reasoning and apply it consistently to any similar situations that may come up in the future.

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Contact Alisa Bousa, SDBA, at 800.726.7322 or via email.