Promissory Notes - Banking & Finance Insights: V 3, Issue 8, November 2023

Bryce Hunter, Joshua Jarrell, Michael Lockaby, Brian Richardson, Joseph Unger, Hugh Wellons
Spilman Thomas & Battle, PLLC
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Volume 3, Issue 8, 2023

Welcome! 

Thank you for reading.

Bryce J. Hunter - Member; Chair, Tax Credits Practice Group; Chair, Community Banking Group; Co-Chair, Banking and Finance Practice Group; and Editor of Promissory Notes

Joshua L. Jarrell - Member; Chair, Public & Project Finance Practice Group; Co-Chair, Banking and Finance Practice Group

FTC Amends Safeguards Rule to Require Non-Banking Financial Institutions to Report Data Security Breaches

“Amendment will require non-bank financial institutions to report when they discover that information affecting 500 or more people has been acquired without authorization.”

Why this is important: On October 27, 2023, the Federal Trade Commission (FTC) announced it has approved an amendment to the Safeguards Rule that would require non-banking institutions to report certain data breaches to the FTC. The FTC’s Safeguards Rule currently requires certain types of non-banking financial institutions, such as mortgage brokers, motor vehicle dealers, and payday lenders, to develop, implement and maintain a comprehensive security program to keep their customers’ information safe. The FTC amendment will require those financial institutions to notify the FTC as soon as possible, and no later than 30 days after discovery, of a security breach involving the unauthorized acquisition of unencrypted customer information of at least 500 consumers. The notice to the FTC will need to include certain information about the event, such as the number of consumers affected or potentially affected. The breach notification requirement becomes effective 180 days after publication of the rule in the Federal Register. --- Bryce J. Hunter

 

What Bank, Fintech Execs are Saying About AI

“Ahead of the Biden administration’s landmark executive order, banks and fintech executives discussed AI use cases and implications.”

Why this is important: Just how are companies utilizing artificial intelligence in their operations in the financial sector? It turns out that many are using it to develop and specifically to improve the customer experience. Generative AI is being increasingly relied upon to fill gaps in the wide array of data collected by fintech companies and others interested in the industry. On the practical end, generative AI can test and supplement virtual assistant software to make it more efficient and responsive to customers. On the predictive end, however, generative AI is being used to answer deeper questions such as modeling predictive analytics into how more diverse new investor and customer behavior patterns will differ from historical data, which has primarily been dominated by male behavior. The recent Executive Order issued by The White House outlines several targets for government use and regulation of artificial intelligence. Unsurprisingly, there is a heavy focus on cybersecurity and privacy regulation initiatives, and the financial sector would do well to consider how their individual use cases can benefit from proactively using AI in their operations and strategic planning. --- Brian H. Richardson

 

CFPB Issues Guidance to Halt Large Banks from Charging Illegal Junk Fees for Basic Customer Service

“Advisory opinion provides guidance on 2010 legal provision regarding customer service by large financial firms.”

Why this is important: Everyone’s favorite governmental agency, the CFPB, is ramping up enforcement on bank fees, particularly focusing on fees some banks charge to provide detailed information about accounts opened at that bank. This may seem obvious, but when banks, for example, sell loans, or other accounts to other financial organizations, some banks did not always keep active files. Digging up the history of that account could be complicated, so some banks charged for it. Evidently, this practice is beginning to reappear, after most banks did away with it after the crash of 2008. Keeping this information close-at-hand does cost time and computer space, and the larger the bank, the more time and computer space this occupies. Have no fear, the CFPB is to the rescue! One of the concerns is that this expands the definition of information it “controls” to include bank employees and some service providers. There are exceptions to the information and activities to which this applies, but they are very limited. This new emphasis only applies to banks over $10 billion in assets. Having said that, since it will set the competitive standard, it also will be difficult for some smaller banks to avoid, although they will not have the reporting responsibilities and potential penalties. --- Hugh B. Wellons

 

Interest Rates are Rising, but States aren’t Worried Yet. Here’s Why.

“State and local governments generally use bonds to finance major infrastructure projects. But higher rates won’t bust budgets just yet.”

Why this is important: Higher bond rates have not hurt state and local governments too much yet for a couple of reasons. First, municipal bond rates are still relatively low historically, and local governments’ budgets are fairly healthy due to conservative budgeting during COVID-19. While rates are relatively high and refundings are very unusual, localities are generally not putting off necessary capital projects due to cost of funds. The rates remain manageable, and if the bond is issued either on a prepayable basis or as an anticipation note (BAN)—which can be extended up to five years in Virginia—then localities believe they are either getting an acceptable rate, or they will be able to do a refunding or redeem the BAN at a lower rate in the future. 

Local governments are sitting on large amounts of cash that came from the American Rescue Plan Act State and Local Government Fiscal Recovery Funds. This cash reserve has two beneficial effects: Localities can either pay cash for smaller projects, or use their interest revenues on their cash on hand to offset some of the additional interest cost on new money bond issues. In our practice, however, we have noticed a renewed focus on tax exemption. While some issuers were content to issue bonds on a taxable basis in order to have flexibility a couple years ago when the rate was 2 percent, they tend to be much more focused on ensuring interest on their bonds is tax-exempt at current interest rates.

As usual, each bond issue is its own special adventure. Spilman Thomas & Battle’s bond counsel team is available to assist you in your municipal finance needs. --- Michael W.S. Lockaby

 

Federal Reserve Board Requests Comment on a Proposal to Lower the Maximum Interchange Fee that a Large Debit Card Issuer can Receive for a Debit Card Transaction

“By law, the Board is required to establish standards for assessing whether an interchange fee received by a large debit card issuer for processing a transaction is reasonable and proportional to certain issuer costs.”

Why this is Important: On October 25, the FRB announced a proposed rule that would lower the maximum interchange fee that a debit card issuer with at least $10 billion in total consolidated assets can receive for a debit card transaction and would also establish a regular process for updating the maximum fee amount every other year going forward. The new proposal would adjust the maximum debit interchange fee to reflect changes, i.e., decreases in issuer costs since the initial rule first took effect in 2011. The new proposal encompasses three components: (1) a base component fee for transaction costs that is being lowered from the original 21 cents to 14.4 cents; (2) the ad valorum component (the estimated value of the transaction), which is being lowered from 5 basis points to 4 basis points; and (3) a fraud prevention adjustment, which will increase slightly from 1 cent to 1.3 cents. Additionally, the proposal would adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered by the FRB from large debit card issuers. The proposed rule could lower merchants’ costs of accepting payments by debit card, and potentially help consumers if merchants pass down their cost savings. From the perspective of card issuers and related fintechs who rely on interchange revenue, it could cause them to cover lost revenue by charging consumers increased fees. The proposal will be open to public comment for 90 days after it is published in the Federal Register. --- Bryce J. Hunter

 

Americans Want Credit Unions and Banks Held to Same Standards

“New ABA survey shows most Americans don’t know the difference between a bank and a credit union.”

Why this is important: As America nears the 20-year mark since Congress last held a hearing on credit union tax exemptions (last heard in 2005), the American Bankers Association has surveyed public knowledge of the differences between credit unions and banks, and the results are telling. More than half of the individuals surveyed either did not know the difference between how credit unions are taxed, compared with banks, or were incorrect. When asked whether businesses providing bank-like services to customers should be held to the same regulation and tax structure as banks, 80 percent of respondents agreed. Bankers are pressing for revision of credit union tax exemptions in the context of credit unions acquiring community banks more frequently. Despite their general similarities in providing finance options for consumers, there are several critical distinctions for credit unions, compared with banks. This survey may tell more about the need for public awareness initiatives, than it does for revisions to tax and regulation, at least for the time being. --- Brian H. Richardson

 

New Business Reporting Obligations: Beneficial Ownership Information Under the Corporate Transparency Act

By Joseph C. Unger

Effective January 1, 2024, most legal entities incorporated, organized, or registered to do business (i.e., LLCs, LLP, PLLC, Inc., Co., etc.) in a state must disclose information relating to its owners, officers, and controlling persons with the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, pursuant to the Corporate Transparency Act (CTA).

For banking institutions: “Any bank, as defined in: (A) Sec. 3 of the Federal Deposit Insurance Act, (B) Sec. 2(a) of the Investment Company Act of 1940, or (C) Sec. 202(a) of the Investment Advisers Act of 1940 is exempt from the CTA."

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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