May 18, 2023

Missouri Law Offers Unique Benefit to Banks Investing Deposits in Federal Reserve Banks

Recent bank failures and the proposed special assessment from the Federal Deposit Insurance Corporation to maintain the Deposit Insurance Fund have triggered public and supervisory attention to how banks invest uninsured deposits via lending or securities. Missouri offers a unique benefit that improves the efficiency of investing in federal reserve bank deposits. In 2019, MBA obtained passage of Senate Bill 174 clarifying the status of interest on deposits held at federal reserve banks as exempt from Missouri income tax (scroll to Line 44 on Page 2).

The current corporate Missouri income tax rate is 4%. The effective after-tax yield for Missouri banks depositing funds with Federal Reserve banks has improved by 25 basis points.

As of May 4, the Federal Open Market Committee’s federal funds rate target range was 5-5.25%. At the Federal Reserve Bank of Kansas City, interest paid to banks increased from $67 million to $485 million from 2021 to 2022. At the Federal Reserve Bank of St. Louis, interest paid to banks increased from $64 million to $385 million.

Banks may want to consider how these options may benefit their operations.

Luetkemeyer Introduces Bill Addressing Noninterest-Bearing Transaction Accounts

Congressman Blaine Luetkemeyer has introduced legislation that would allow the board of directors of the Federal Deposit Insurance Corporation to guarantee noninterest-bearing transaction accounts for up to 60 days in the event systemic risk exception is implemented.

The Small Business Stability Act sponsored by Luetkemeyer would give emergency power of Transaction Account Guarantees to the U.S. Treasury Department. TAG accounts offer unlimited insurance coverage and were created by the FDIC, in consultation with the U.S. Treasury and Federal Reserve Board, during the 2008 financial crisis. The program ended in 2011. TAG accounts were used for corporations and some municipalities.

MBA staff is reviewing the bill and welcomes feedback from its members about the legislation.

Lawmakers Introduce Bipartisan ACRE Legislation

New legislation benefiting farmers, ranchers and rural communities introduced in the U.S. House would provide flexibility for more financial institutions to offer affordable credit to agricultural borrowers. The Access to Credit for our Rural Economy Act of 2023 would reduce interest payments, increasing the cash flow for agricultural operations and reducing the need for off-farm income.

“We are excited to see this legislation introduced in the House that will provide critical economic support to rural communities,” said MBA President Jackson Hataway. “MBA is working with our congressional delegation to sign on to support this bipartisan measure, and we encourage our members let their representatives know how this bill will benefit their customers and rural communities.”

ACRE mirrors the Enhancing Credit Opportunities in Rural America Act, known as ECORA, introduced in the last Congress. ACRE would amend IRS code to level the playing field for community banks to administer agricultural real estate loans by granting them tax-exempt status on earned interest. The same exemption already applies to farm credit institutions. The exemption also would apply to single-family home mortgage loans in rural communities with fewer than 2,500 residents and for mortgages less than $750,000.

The American Bankers Association estimates the legislation would expand access to affordable agricultural and home loans to more than 4,000 rural communities. ACRE would deliver approximately $1.4 billion in annual interest expense savings to farmers and ranchers in 2023 — approximately $950 million in annual interest expense savings for loans secured by farmland and $450 million for rural mortgages, according to ABA figures. 

Regulators, CEOs Testify in Hearings on Bank Failures

Federal banking regulators testified before the House Financial Services Committee Tuesday on the recent bank failures, where they were pressed on why supervisors did not elevate concerns raised about Silicon Valley Bank ahead of its closure.

A Federal Reserve report released in April faulted SVB’s management for its failure, but it also identified instances in which agency supervisors failed to elevate problems they found at the bank.

Congressman Blaine Luetkemeyer questioned Fed Vice Chairman for Supervision Michael Barr why nothing was done when examiners found problems with SVB’s liquidity and interest rate risks.

Former top executives from SVB, Signature Bank and First Republic Bank testified Wednesday before a joint hearing of the Subcommittees on Financial Institutions and Monetary Policy and Oversight and Investigations about the failures of their respective banks and the caution that should be exercised going forward.

In his questions, Luetkemeyer noted that “as tragic as the situation is, I think it’s also a learning moment for all of us. An instructive moment I think for us in Congress, for the regulators, and for bankers around the country quite frankly. From the standpoint that I think we’re in a new world now with regards to social media and the actions that could be taken, the actions that could have adverse effects on our financial system, our culture, our economy. And I’m very concerned about it.”

Luetkemeyer also shared these concerns during a recent podcast episode on “Our Two Cents with MBA.”

The Senate Banking Committee also heard testimony this week from federal banking regulators and from the former bank executives.

Senate, House Committee Heads Ask SBA to Pause Small Business Lending Changes

The leaders of the House and Senate small business committees have asked the Small Business Administration to “pause” changes to its lending programs until a permanent associate administrator is confirmed to oversee the programs.

SBA issued final rules in April to lift the moratorium on the number of nondepository lenders in the 7(a) program and to remove the nine-factor underwriting standard for 7(a) loans. The banking industry and lawmakers, including Congressman Blaine Luetkemeyer, have raised concerns about the proposed changes, pointing to reports that found limited agency oversight of nondepository lenders and significant fraud committed through Paycheck Protection Program loans originated by fintech firms. Luetkemeyer expressed his concerns about the changes on a recent podcast episode on “Our Two Cents with MBA.”

In a joint letter, the committee chairs and ranking members noted the recent departure of Patrick Kelley, who had been associate administrator for the Office of Capital Access. Kelley’s absence is “a void in leadership at a time when such leadership will be key in overseeing the orderly implementation of the new lending rules.”

“As small businesses and lenders begin to work through these new requirements, it is key to have this position filled with a qualified candidate equipped to handle any issues as they inevitably arise,” the lawmakers wrote. “As a result, we believe that it is best for a new permanent associate administrator for the Office of Capital Access to be in place prior to these changes going into effect.”

During a House Small Business Committee hearing last Tuesday, members of both parties expressed concerns with SBA’s decision to lift the moratorium on the number of nondepository lenders in the 7(a) program while loosening underwriting requirements.

“Given the unacceptable levels of fraud that occurred in the SBA’s pandemic programs, I have serious concerns that the agency is not up to the task of taking on more responsibilities,” said Committee Chairman Roger Williams, R-Texas.

In a recent procedural notice, SBA stated it will require more robust underwriting criteria than provided in the final rules for 7(a) loans greater than $500,000. In those rules, SBA removed the nine-factor test for underwriting 7(a) loans, replacing it with a less stringent test. The banking industry had criticized SBA’s decision to remove the nine-factor test, which provided an important guardrail to ensure that nondepository institutions engaged in safe and sound 7(a) lending.

After the hearing, SBA issued a revised standard operating procedure that outlines critical requirements that lenders must follow to both obtain and maintain their SBA guarantees. The SOP is effective Aug. 1.

MBA Urges Passage of SAFE Banking Act

MBA joined the American Bankers Association and state banking associations in urging lawmakers to advance the SAFE Banking Act, emphasizing that it would benefit law enforcement efforts, tax collection and public safety.

The letter was sent to leaders of the Senate Banking Committee, which recently held its first hearing on the SAFE Banking Act since 2019. The legislation has passed the House seven times in prior Congresses.

“The inability of the state-licensed cannabis industry to access safe and regulated financial services is a pressing concern for so many of our nation’s communities and the banks that serve them,” the associations wrote. “With state-licensed cannabis businesses currently authorized in 38 states and more states weighing legalization, we urge you to address these critical issues by marking up and advancing the SAFE Banking Act as quickly as possible.”

Sen. Jeff Merkley, D-Ore., testified as one of the bill’s key sponsors during the hearing and emphasized the money laundering risks that exist because of the legal cannabis industry’s cash economy.

“There is nothing like a cash economy to facilitate money laundering,” he said. “The lack of electronic records in this world makes it really easy to move money that shouldn’t be moved.”

MBA continues to urge bankers to contact their lawmakers in support of the SAFE Banking Act.

FHFA Rescinds DTI Ratio-based Fee

The Federal Housing Finance Agency is rescinding a new debt-to-income ratio-based fee. This action follows advocacy from the banking industry noting operational challenges associated with the DTI fee. The upfront fee, scheduled to go into effect Aug. 1, was part of a broader set of changes to the single-family guarantee fee pricing framework and would have applied to certain borrowers with a debt-to-income ratio above 40%.

FHFA’s decision does not address broader changes to loan-level price adjustment fees that took effect May 1 that have generated significant debate on Capitol Hill and in the media. As previously shared, MBA has expressed its concerns to several federal agency directors about how this FHFA rule affecting mortgage loans has significant impacts for consumers.