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External Risk Events Report April 2021

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External Risk Events Report April 2021 RISK EVENTS REPORT April 2021 TABLE OF CONTENTS • Introduction • Overview • Risk Events by Category • Significant Management Changes 1233 20th Street NW, Suite 450 For more information contact: Washington, DC 20036 Claude Hanley, Partner Capitalperform.com Tel: 703-861-8623 @CPG_DC [email protected] RISK EVENTS REPORT APRIL 2021 RISK EVENTS REPORT SUMMARY Capital Performance Group tracks events at financial institutions and financial technology firms across the country which could have risk implications for the industry. This sample report focuses on events at large banks in the United States as well as selected nonbank financial companies, fintechs, and payments companies. Within each risk type, events are sub-divided into three categories based on the relative significance of the event or the size of the fine or penalty levied against the institution in question: H I G H M E D I U M L O W PRIORITY PRIORITY PRIORITY The report contains a recap of legislative actions, proposed regulatory rules and enforcement actions among U.S. regulatory agencies involved in financial oversight. Risk events are organized under eight types of risk for easy review: 1. Market/Interest Rate Risk – changes or potential changes to rates 2. Liquidity – changes to markets or regulations that could impact an institution’s ability to fund its assets 3. Operational – when the failure of a system, process, or person results in a loss or penalty 4. Credit – instances of increased charge-offs or nonperforming loans in a particular credit segment 5. Fiduciary & Suitability – when an institution fails to act in the best interest of either shareholders or clients 6. Regulatory Risk– when an institution is penalized due to noncompliance with a law or regulation 7. Reputational – ongoing lawsuits/investigations and settlements of lawsuits 8. Strategic – changes in the competitive environment of a market that could impact the ability of other institutions to meet their strategic goals PROPRIETARY 2 RISK EVENTS REPORT APRIL 2021 APRIL 2021 OVERVIEW NOTABLE RISK EVENTS (PAGES 7-20) Market/Interest Rate Risk (pg. 7): Reputational Risk, cont’d (pg. 12): • Household income rose at a record pace of • In a letter to 27 banks, a group of asset 21.1% in March. Household spending increased managers, including Pacific Investment 4.2% in March, the steepest month-over-month Management Co. LLC, urged the lenders to increase since last summer. commit to eliminating greenhouse-gas • The U.S. gross domestic product (GDP) grew at emissions across their operations by 2050 and a 6.4% annual rate and approached its pre- establish interim reduction targets. pandemic size in 1Q21. Many economists Strategic Risk (pg. 15): expect GDP to grow between 6.0% and 7.0% in • 2021. Big national banks are on track to surpass regional and midsize banks in overall customer • Existing home sales dropped 3.7% to a satisfaction. The results are according to the seasonally adjusted annual rate of 6.01 million latest iteration of J.D. Power’s annual U.S. Retail units in March, the lowest level since August Banking Satisfaction Study. 2020, according to the National Association of Realtors. • JPMorgan Chase & Co. is planning to offer its private wealth clients an actively managed • Federal Reserve Chairman Jerome Powell said bitcoin fund, which could be launched as soon that the central bank will begin to slow the pace as this summer. of its bond purchases “well before” raising interest rates. • Large banks, including Bank of America Reputational Risk (pg. 12): Corporation, Citigroup Inc. and Morgan Stanley, are making wealth-management services to • BlackRock Inc. increased its support for ultra high-net-worth individuals a key part of shareholder-led environmental, social and their strategy, noting increases in the account governance proposals (ESG), and published balances for these clients over the past year. criticisms of public companies that haven’t complied with its ESG requests. NOTABLE REGULATORY & LEGISLATIVE & EVENTS (PAGES 4 - 6) • The Consumer Financial Protection Bureau (CFPB) issued a final rule extending the mandatory effective date for its general Qualified Mortgage (QM) rule from July 1, 2021 to October 1, 2022. • The Basel Committee published two papers on climate-related risk that will serve as a “conceptual foundation” as the committee works to incorporate climate risk into the Basel regulatory framework. • The Department of Housing and Urban Development (HUD) will revive a 2013 disparate impact rule that makes lenders liable for practices that were unintentionally discriminatory. • President Biden proposed fundamental changes to the tax code under the American Families Plan. PROPRIETARY 3 RISK EVENTS REPORT APRIL 2021 REGULATORY & LEGISLATIVE EVENTS REGULATORY EVENTS 1. The CFPB issued a final rule extending the mandatory effective date for its general QM rule from July 1, 2021 to October 1, 2022. With this action, the CFPB also extended the temporary “government-sponsored enterprise (GSE) patch” until the new mandatory compliance date or until Fannie Mae and Freddie Mac exit conservatorship. 2. The Basel Committee published two papers on climate-related risk that will serve as a “conceptual foundation” as the committee works to incorporate climate risk into the Basel regulatory framework. 3. The Department of Housing and Urban Development will revive a 2013 disparate impact rule that makes lenders liable for practices that were unintentionally discriminatory. The proposed rule has not yet been published in the Federal Register. 4. The Federal Housing Finance Agency (FHFA), the federal regulator of Fannie Mae and Freddie Mac, unveiled a new program to ease credit requirements, simplify documentation and waive certain fees for borrowers who make 80.0% or less of their area’s median income and not have missed more than one mortgage payment in the past 12 months. The program only applies to borrowers with existing loans backed by the mortgage giants and it will be up to lenders to participate in it. 5. The Financial Crimes Enforcement Network (FinCEN) is requesting feedback on the Corporate Transparency Act (CTA), included in the Anti Money Laundering Act (AML) act of 2020. The CTA is a reporting requirement that increases the difficulty involved for harmful actors to exploit opaque legal structures for laundering money, financing terrorism, committing tax fraud, and other crimes. 6. The Office of the Comptroller of the Currency (OCC) conditionally approved the application of Paxos Trust Co.’s application to form Paxos National Trust. It is the first cryptocurrency company to form a de novo national trust bank. 7. Alex Oh, who was recently named head of the Securities and Exchange Commission (SEC) Enforcement Division, resigned. Oh cited a complication in a case from her prior legal career. 8. The White House is expected to soon issue an executive order on climate change which could require the Financial Stability Oversight Council to assess how climate change could hurt financial companies and markets, and to gather and share relevant data. 9. The U.S. Treasury Department named John Morton as head of the agency’s new “climate hub”. The new role will entail fostering green finance and tax policies to help reduce carbon emissions and Morton will advise Secretary Yellen on climate-related issues. 10. The OCC announced that it does not plan to implement the revised Community Reinvestment Act (CRA) rule developed by the Trump administration. Regulatory Events continue on the next page. PROPRIETARY 4 RISK EVENTS REPORT APRIL 2021 REGULATORY & LEGISLATIVE EVENTS REGULATORY EVENTS, CONTINUED 11. The Treasury Department created a new office to supervise the disbursement of billions in relief funds to combat COVID-19 related economic hardship. The “Office of Recovery Programs” will oversee the distribution of $420.0B in support, including the $1.4K individual stimulus payments from President Biden’s $1.9T relief act. 12. Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams said that reliance on outdated legacy systems and processes threaten the banking sector’s resilience. 13. The SEC says financial industry firms offering ESG investments have a variety of gaps in disclosures and compliance. The SEC issued a risk alert stating firms must ensure consistent compliance across departments and accuracy in public communication on ESG investments. 14. The federal banking agencies and the FinCEN issued a statement on the use of the “Supervisory Guidance on Model Risk Management” to comply with Bank Secrecy Act (BSA)/AML rules. The agencies emphasized that that the guidance does not alter existing BSA/AML regulatory requirements or establish new supervisory expectations. 15. The CFPB intends to delay a pair of debt collection rules finalized at the end of the Trump administration. The first rule, which had been finalized at the end of November 2020, outlines standards around how debt collectors can communicate with borrowers, including how often they can be called, texted or emailed. The second, published in December 2020, clarified the type of disclosures debt collectors must make to borrowers they are pursuing. 16. Treasury Secretary Janet Yellen announced that the Department of the Treasury is working with Group of 20 (G20) countries to agree to a global corporate minimum tax rate, pledging that the U.S.’s cooperation would strengthen the global economy and advance U.S. interests. Finance ministers from the G20 leading economies announced plans to agree on a global
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