Monday, February 6, 2023

Executive News: Looking back at runoffs; legislative, regulatory info

This is my favorite time of year. Hopefully, the temperature will start dropping, and most importantly, it’s college football season.

We are one game into the season and both OU and OSU are undefeated and positioned to have great seasons. While fa

Adrian Beverage, OBA President and CEO

ns of those schools get to enjoy victory after victory, I’ll be in the corner crying as Nebraska’s title hopes were laid to rest the first week of the season.

I’m equally excited because it’s almost election time, the primaries and run-offs are behind us and we know who will be on the general election ballot in November.

Washington is being Washington, introducing legislation and the onslaught of rules, advisements and other treats are flowing from our regulators. As much as I’d like to spend this entire article breaking down college football, I think it’s best to give you some information on the elections and what’s being proposed that isn’t banker friendly.

On Aug. 23, several statewide run-off elections were held to determine who would move on to the general election in November. Of these races, there were a handful that received a lot of media attention, and most likely, a lot of push cards in your mail box.

The battle for the Republican nominee in the state treasurer’s race was between Todd Russ and Clark Jolley. Both of these men are friends of the OBA and have been strong supporters of community banks while they were in the state legislature. Todd was close to winning the Republican nomination outright in the June primary as he received 48.51% of the vote, falling just short of the 50% + 1 threshold to be the winner.

We knew Clark wouldn’t go down without a fight, and we all saw just that when he launched a barrage of negative ads against Todd about 10 days prior to the election.

There are two things that have always been said about negative ads in politics: 1. the first person to go negative is the one who is behind in the polls; 2. people will stop going negative when the negative ads stop working.

History has shown negative ads against your opponent move the needle a lot more than a positive ad about yourself. Clark was clearly losing when he released his negative ads, and they were really negative toward Todd. It was incredibly surprising to me and a lot of political junkies in Oklahoma that Todd didn’t return the favor towards Clark and go negative as well. You usually always see the leader in the polls throw out some negative ads against his or her opponent to try and neutralize their own negative ads. But, Todd didn’t go negative. I spoke with him right after the election and asked him why?

“That’s not who I am, I wanted to win this race on the fact that I was the best candidate, not because I trashed my opponent better than he trashed me,” he said.

Obviously, it was the right strategy for Todd as he won the race by a margin of almost 10% and won 72 of 77 counties in Oklahoma.

The other runoff that provided a lot of intrigue was the race for the Republican nomination for the open U.S. Senate seat. It was a battle between two political veterans, Markwayne Mullin and T.W. Shannon.
The polling for this runoff always had Markwayne in the lead, but as we got closer to Aug. 23, you started to hear rumblings T.W. had closed the gap and it might be a close race.

At the end of the night on the 23rd, it was clear those rumblings of a tight race were flat wrong. Markwayne won the Republican nomination by a 10% margin. I will say even though the margin of victory for Markwayne was quite large, it was a great race. Both candidates stayed positive and each of them were a class act during the entire campaign.

We’ll have a lot more information on all the statewide candidates in future upcoming articles.

•       •         •
While the elections will take center stage for the next couple of months, especially in Washington, there is still plenty of legislation and regulatory information being thrown at the industry. There are two bills still moving through the process that would negatively impact your bank.

H.R. 4277 — The Overdraft Protection Act of 2021
Introduced by Rep. Carolyn Maloney (D-N.Y.).
Passed the House Financial Services Committee on July 22 along party lines.
60 co-authors (all Democrats).
Financial institutions would be prohibited from charging consumers more than one overdraft fee in a month and no more than six overdraft fees in a year regardless of a consumer’s choice to opt in.
Just a little bit of information that may or may not change the fate of this bill. Due to redistricting, Rep. Maloney was forced into the same legislative district as Rep. Jerry Nadler. After the drawing of the new districts, they both currently represent Manhattan. This forced them into a primary election on Aug. 23. Rep Nadler easily won and now Rep. Maloney is out of a job. So, hopefully, she will focus on other items during her last couple of weeks in Washington. We assume another Democrat in the House will pick up this bill and run with it, but as we get closer to November, that scenario starts to dwindle.

S. 4674 — Credit Card Competition Act of 2022
Sen. Dick Durbin (D-Ill.) & Sen. Roger Marshall (R-Kan.).
Introduced in Senate on July 28.
At this time, there aren’t any additional Senate authors.
Several Senate Democrats have said they are opposed to this bill.
This bill would require credit cards to offer two unaffiliated networks for transaction routing at banks over $100 billion in assets.
The Federal Reserve will determine what networks are approved under this bill.
This bill would ensure that merchants can dictate the network and ensure they go across the cheapest network for merchants regardless of the impact to customers, privacy or risk associated with the network.
Credit cards that offer rewards such as hotel and airline points would most likely be eliminated.
This legislation would be yet another hit to non-interest income.

Proposed increase in deposit insurance assessments
FDIC signaled in June its intent to raise rates started during the first quarterly assessment period of 2023.
The proposed increase which would remain in effect until the DIF reserve ratio meets the FDIC’s long-term goal of 2%.
This increase would amount to a 54% increase in the current average assessment rate.
The FDIC previously approved a DIF restoration plan to reserve the ratio to the statutory minimum of 1.35% in 2028.
A sustained increase in insured deposits due to the pandemic and major unrealized losses in the securities portfolio caused the reserve to drop to 1.23% earlier this year.

Supervisory guidance on multiple re-presentment NSF fees
The FDIC issued guidance to ensure supervised institutions are aware of the consumer compliance risks associated with assessing multiple NSF fees arising from the re-presentment of the same unpaid transaction. Below is the information from the FDIC, please go to www.oba.com for more information.

Background
Many financial institutions charge NSF fees when checks or Automated Clearinghouse transactions are presented for payment, but cannot be covered by the balance in a customer’s transaction account. After receiving notice of declination, merchants may subsequently resubmit the transaction for payment. Some financial institutions charge additional NSF fees for the same transaction when a merchant re-presents a check or ACH transaction on more than one occasion after the initial unpaid transaction was declined. In these situations, there is an elevated risk of violations of law and harm to consumers.

During consumer compliance examinations, the FDIC has identified violations of law when financial institutions charged multiple NSF fees for the re-presentment of unpaid transactions. The FDIC found that some disclosures provided to customers did not fully or clearly describe the institution’s re-presentment practice, including not explaining that the same unpaid transaction might result in multiple NSF fees if an item was presented more than once.

Potential risk arising from multiple re-presentment NSF fees
Consumer compliance risk: Practices involving the charging of multiple NSF fees arising from the same unpaid transaction results in heightened risks of violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. While specific facts and circumstances ultimately determine whether a practice violates a law or regulation, the failure to disclose material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers, and there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions.

Deceptive practices: In a number of consumer compliance examinations, the FDIC determined that if a financial institution assesses multiple NSF fees arising from the same transaction, but disclosures do not adequately advise customers of this practice, the misrepresentation and omission of this information from the institution’s disclosures is material.

Unfair practices: In certain circumstances, a failure to adequately advise customers of fee practices for re-presentments raises unfairness concerns because the practices may result in substantial injuries to customers; the injury may not be reasonably avoidable; and there may be no countervailing benefits to either customers or competition. In particular, a risk of unfairness may be present if multiple NSF fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for customers to bring their account to a positive balance in order to avoid the assessment of additional NSF fees.

Third-Party Risk: Third parties, including core processors, often play significant roles in processing payments, identifying and tracking re-presented items, and providing systems that determine when NSF fees are assessed. Such third-party arrangements may present risks if not properly managed. Institutions are expected to maintain adequate oversight of third-party activities and appropriate quality control over products and services provided through third-party arrangements. In addition, institutions are responsible for identifying and controlling risks arising from third-party relationships to the same extent as if the third-party activity was handled within the institution. Institutions are encouraged to review and understand the risks presented from their core processing system settings related to multiple NSF fees, as well as understand the capabilities of their core processing system(s), such as identifying and tracking re-presented items and maintaining data on such transactions.

Litigation Risk: Multiple NSF fee practices may result in heightened litigation risk. Numerous financial institutions, including some FDIC-supervised institutions, have faced class action lawsuits alleging breach of contract and other claims because of the failure to adequately disclose re-presentment NSF fee practices in their account disclosures.

Risk mitigation practices
Institutions are encouraged to review their practices and disclosures regarding the charging of NSF fees for re-presented transactions. The FDIC has observed various risk-mitigating activities that financial institutions have taken to reduce the potential risk of consumer harm and avoid potential violations of law regarding multiple re-presentment NSF fee practices. These include:
Eliminating NSF fee.
Declining to charge more than one NSF fee for the same transaction.
Conducting a comprehensive review of policies, practices and monitoring activities related to re-presentments and making appropriate changes and clarifications, including providing revised disclosures to all customers.
Clearly and conspicuously disclosing the amount of NSF fees to customers and when and how such fees will be imposed, including:
Information on whether multiple fees may be assessed in connection with a single transaction when a merchant submits the same transaction multiple times for payment;
The frequency with which such fees can be assessed; and
The maximum number of fees that can be assessed in connection with a single transaction.
Reviewing customer notification or alert practices related to NSF transactions and the timing of fees to ensure customers are provided with an ability to effectively avoid multiple fees for re-presented items, including restoring their account balance to a sufficient amount before subsequent NSF fees are assessed.
If institutions self-identify re-presentment NSF fee issues, the FDIC expects supervised financial institutions to:
Take full corrective action, including providing restitution to harmed customers, consistent with the restitution approach described in this guidance.
Promptly correct NSF fee disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers.
Consider whether additional risk mitigation practices are needed to reduce potential unfairness risks; and
Monitor ongoing activities and customer feedback to ensure full and lasting corrective action.

FDIC’s supervisory approach
When exercising supervisory and enforcement responsibilities regarding multiple representment NSF fee practices, the FDIC will take appropriate action to address consumer harm and violations of law. The FDIC’s supervisory response will focus on identifying re-presentment related issues and ensuring correction of deficiencies and remediation to harmed customers.

In reviewing compliance management systems, the FDIC recognizes an institution’s proactive efforts to self-identify and correct violations. Examiners will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of a consumer compliance examination. In addition, in determining the scope of restitution, the FDIC will consider an institution’s record keeping practices and any challenges an institution may have with retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period institutions utilized for customer remediation.

If examiners identify violations of law due to re-presentment NSF fee practices that have not been self-identified and fully corrected prior to a consumer compliance examination, the FDIC will evaluate appropriate supervisory or enforcement actions, including civil money penalties and restitution, where appropriate.