Congress should revise recently adopted statutes on brokered deposits, and it should give the credit union regulator authority to examine (and enforce actions) over third-party vendors, two federal financial institution regulators said Tuesday in congressional testimony.
Meanwhile, a third regulator said his agency is exploring how to differentiate between “harmful rent-a-charter arrangements” between banks and financial technology (fintech) companies.
Testifying before the Senate Banking Committee, the leaders of the Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC) each outlined actions their agencies have taken over the last year on a variety of areas, including their response to the coronavirus crisis and ensuring financial inclusion.
The regulators also outlined their requests to Congress to make changes in the law or, in the case of Acting Comptroller Michael J. Hsu, to respond to actions recently taken by Congress.
Among other things, FDIC Chairman Jelena McWilliams urged Congress to tweak the brokered deposits statute, last amended in 2018, to replace the section of the Federal Deposit Insurance Act that deals with brokered deposits with a “simple restriction on asset growth for troubled institutions.” She said that approach would be “a far simpler regime for the FDIC and industry to administer, and would more directly address the problem Congress was trying to tackle in the original legislation.” The legislation was originally adopted in 1989.
“I continue to believe that a simple restriction on asset growth for troubled institutions would be a superior approach in the long run,” McWilliams said.
Meanwhile, NCUA Board Chairman Todd Harper asked Congress to give his agency exam and enforcement authority over third-party vendors, including credit union service organizations (CUSOs), which are credit union-owned entities that provide additional services to one or more credit unions. Calling the lack of authority a “regulatory blind spot,” Harper noted that the NCUA should have authority comparable to that already held by other federal financial institution regulators.
“While there are many advantages to using these service providers, the concentration of credit union services within CUSOs and third-party vendors presents safety and soundness and compliance risk for the credit union industry,” Harper told the committee.
He said the top five credit union core processor vendors provide services to approximately 87% of total assets held by credit unions. Additionally, he said, the top five CUSOs provide services to nearly 96% of total credit union system assets.
“A failure of even one of these vendors represents a significant potential risk to the (National Credit Union) Share Insurance Fund and the potential for losses from these organizations are not hypothetical,” Harper asserted. “Between 2008 and 2015, CUSOs contributed to more than $300 million in losses to the Share Insurance Fund alone.”
He told the committee that the continued transfer of operations from credit unions to CUSOs and other third parties diminished the agency’s ability to “accurately assess all the risks present in the credit union system and determine if current CUSO or third-party vendor risk-mitigation strategies are adequate.”
Acting Comptroller Hsu didn’t so much ask for something from Congress, but he said he respected its action last month to repeal the agency’s “true lender” rule under the Congressional Review Act. The rule repeal was signed into law by President Joe Biden (D) June 30. The rule – adopted swiftly by the OCC last year in a process that took fewer than four months – determined when a bank is a “true lender” within the context of a partnership between it and a third party.
However, critics assailed the rule, saying it left customers vulnerable to predatory “rent-a-bank” schemes, in which an agreement is made between a bank and a third party to advance the loan – but then the bank takes over the loan once the transaction is completed. The skeptics said that amounted to an “end-run” around state laws meant to prohibit that practice (among others), which have been called “predatory” by some.
“Predatory lending has no place in the federal banking system,” Hsu said. “Indeed, promoting fairness is a critical part of the OCC’s mission.” He said he has instructed agency staff to gather and analyze data on bank-fintech partnerships in order to explore how the OCC can “differentiate between harmful rent-a-charter arrangements and healthy partnerships that expand financial inclusion.”
The resulting analysis, he said, will inform the development of options to protect consumers and expand financial inclusion.