Weekly Fintech Focus
- The Federal Reserve is quickly moving up its timeline for the launch of its real-time payment service.
- FinCEN issues new FAQs to clarify that covered financial institutions have flexibility and discretion in how they conduct customer due diligence and update information about their customers.
- FFIEC issues a statement on COVID-19 loan accommodations.
- CFPB complaints on payments increase during the pandemic.
- FDIC Final Rule allows for greater employment of those with minor criminal offenses.
Federal Reserve Quickly Rolling out its Real-Time Payment Service
On August 6, 2020, the Federal Reserve issued a notice providing new details about the FedNow Service, its real-time payments system. The Federal Reserve had planned on launching the FedNow Service in 2023 or 2024, but in this announcement asserts that it will launch far sooner now that the Federal Reserve has approved the core features and functionality of the FedNow Service. The Federal Reserve intends to announce more specific timeframes for launch as well as earlier pilot programs. The FedNow Service is designed to provide “uninterrupted 24x7x365 processing with security features to support payment integrity and data security.” Participants in the FedNow Service will need adequate funds or available credit in their accounts at all times in order to settle each payment. This may require banks with account balances beyond their current needs to provide liquidity to other institutions facing shortfalls. The FedNow Service will provide liquidity management tools to support instant payment services.
The first launch of the FedNow Service will provide baseline functionality to support market needs and help banks transition to the service. It will also provide optional features such as fraud prevention tools, and the ability (a) to join as a receive-only participant, (b) to request for payment capability, and (c) to utilize tools to support participants in their handling of payment inquiries, reconcilements, and certain exceptions.
Fed Governor Lael Brainard gave a speech about the Federal Reserve’s announcement to discuss the growth and development of the FedNow Service. Citing the demands of distributing pandemic stimulus funds, Brainard said that the FedNow Service is needed sooner to supplement current payment methods and provide faster payments than can be done through direct deposit, prepaid debit cards, and checks as the Federal Reserve used for pandemic relief funds. In her remarks, Brainard also noted that the Federal Reserve focuses on the safety and integrity of the U.S. payment system, and through the FedNow Service will offer an alternative to some other newer payment services that look and feel like instant payment services, but actually rely on legacy infrastructure that settles transactions on a deferred basis. She notes that this creates risk for consumers, banks and the payment system, whereas the FedNow Service will offer real-time gross settlement of transactions, which processes transactions individually and immediately and avoids interbank credit risk.
FinCEN Issues New CDD FAQs to Give Flexibility on Risk-Based Assessments
On August 3, 2020, the Financial Crimes Enforcement Network (FinCEN) issued new FAQs about customer due diligence (CDD) requirements for covered financial institutions. The FAQs aim to clarify requirements related to obtaining customer information, establishing a customer risk profile, and performing ongoing monitoring of customer relationships. The new FAQs are in addition to FAQs issued on July 19, 2016 and April 3, 2018. The new FAQs focus on making covered financial institutions aware that the institutions have flexibility regarding the ways they make risk-based determinations about customers and products.
Customer Information—Risk-Based Procedures
The first FAQ clarifies that under the CDD Rule, a covered financial institution is not categorically required to (1) collect any particular CDD information (other than that required to develop a customer risk profile, conduct monitoring, and collect beneficial ownership information); (2) perform media searches or particular screenings; or (3) collect customer information from a financial institution’s clients when the financial institution is a customer of a covered financial institution. A covered financial institution’s determination to conduct these types of CDD should be tied to the financial institution’s risk-based assessment of the customer relationship and the financial institution’s business. Covered financial institutions must still create risk-based policies to determine when the financial institutions must update or review customer information.
Customer Risk Profile
The second FAQ clarifies that a covered financial institution is not required to use a specific method or categorization to establish a customer risk profile or to automatically categorize as “high risk” products or customer types listed in government publications. Instead, there are no prescribed risk profile categories, and the customers and products should be reviewed on a case-by-case basis.
Ongoing Monitoring of the Customer Relationship
The third FAQ clarifies that there is no categorical requirement that financial institutions update customer information on a continuous or periodic schedule. Rather, the requirement is that the institution update customer information as part of its normal risk-based monitoring. The financial institution’s risk-based assessment should guide the timing and the type of information that is updated or reviewed about the customer relationship.
FFIEC Encourages Financial Institutions to Be Flexible with COVID-19 Loans
The Federal Financial Institutions Examination Council (FFIEC) issued a statement on behalf of its members that sets forth risk management and consumer protection principles for financial institutions to consider when working with borrowers as initial COVID-19-related loan accommodation periods come to an end. Because some borrowers may be able to resume contractual payments and others might not, the agencies encourage financial institutions to consider, when appropriate, additional accommodations that can ease cash flow pressures on impacted borrowers and improve their capacity to service debt.
As noted within, the principles set forth are consistent with those in the Interagency Guidelines Establishing Standards for Safety and Soundness and are summarized at a high-level as follows:
- Prudent Risk Management Practices. These include identifying, measuring, and monitoring the credit risks of loans that receive accommodations. For example, a reasonable accommodation may not automatically result in an adverse risk rating solely because of a decline in the underlying collateral.
- Well-Structured and Sustainable Accommodations. Continued financial challenges for a borrower may warrant additional accommodation options to mitigate loss to both the borrower and the financial institution. It’s generally appropriate for the financial institution to assess each loan based on the fundamental risk characteristics affecting the collectability of that particular credit.
- Consumer Protection. The FFIEC encourages financial institutions to provide consumers with options for repaying missed payments at the end of their accommodation period to avoid delinquencies and other adverse consequences. They have set forth several effective approaches within their statement.
- Accounting and Regulatory Reporting. Financial institutions must follow applicable accounting and regulatory reporting requirements for all loan modifications. The FFIEC recommends that financial institutions refer to section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), among others, to ensure reporting requirements are met.
- Internal Control Systems. Appropriate targeted testing of the process for managing each stage of any loan repayment accommodation should be conducted. Even when a financial institution outsources these functions, the financial institution still remains responsible for ensuring that the service provider acts consistently with applicable laws, regulations, and the financial institutions policies and procedures.
CFPB Complaints on Payments Increase During Pandemic
Consumer complaints to the Consumer Financial Protection Bureau (CFPB) have increased since a national emergency was declared to deal with the pandemic. Per CFPB data, complaints involving credit cards and prepaid products were up 29% year-over-year and complaints regarding money services (including money-transfers and virtual currency) rocketed up 77% year-over-year.
The largest single complaint category was with government benefit cards and involved merely obtaining one. This likely resulted in problems exhibited in the distribution of the initial CARES Act stimulus. With regard to those complaints in the money services category, the largest category was complaints about opening, closing, or managing an account. Fraud and other scams also saw a noteworthy rise.
FDIC Final Rule Allows Greater Employment of Individuals with Minor Criminal Offenses
The Federal Deposit Insurance Corporation (FDIC) approved a final rule to revise section 19 of the Federal Deposit Insurance Act, which prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of a crime involving dishonesty, breach of trust, or money laundering, or has entered into a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC.
Under the revised rule, the FDIC will promote key public policy objectives by reducing barriers for individuals who have paid their debt to society and reformed their conduct and who want to gain employment with a financial institution. The FDIC also would like to enhance transparency and accountability by reducing the regulatory burden for financial institutions and individuals. Specifically, the revised rule narrows the circumstances under which the FDIC’s consent is required for financial institutions to hire those with minor criminal offenses.
To summarize, those with expunged offenses will be exempt from having to submit an application to the FDIC. Likewise, those with de minimis offenses like possession of a fake ID and petty theft will also be exempt. Under this new rule, the FDIC believes that applications for consent will be reduced by approximately 20%.