November 8, 2017

New Proposal to Combat Appraiser Shortage
Community Bank Lending to Small Business Understated
Increase In Riskier Longer-Term Auto Loans
New HMDA Platform Launched
Powell Nominated to Chair Fed Reserve
Next Gen Security: 3-D Secure 2.0


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New Proposal to Combat Appraiser Shortage                             
As lenders continue to raise concerns about a lack of certified appraisers, particularly in rural areas, the Appraisal Qualifications Board this week released a fourth exposure draft of a proposal to change the qualification criteria for real property appraisers.
Importantly, the AQB proposed to remove college degree requirements for licensed residential appraisers and provide alternatives to the bachelor's degree requirement for certified residential appraisals. The proposal also outlines an alternative track for licensed residential appraisers to become certified without obtaining a bachelor's degree. In addition, it would reduce the number of field hours needed from 2,000 to 1,000 for licensed appraisers and 2,500 to 1,500 for certified appraisers. Comments on the proposal are due Jan. 12.
The FDIC released a preview of a survey that underscores the importance of community banks in lending to small business. The survey, issued during the FDIC Community Bank Advisory Committee on Community Banking, contains these findings: 
  • Relying on Call Reports understates small business lending by about $38 billion annually, largely by excluding certain commercial and investment lending above $1 million and the use of residential mortgages in certain transactions
  • Most community banks lend to start-ups, especially outside urban centers
  • Customer relationship is the greatest competitive advantage of community banks
  • "Small banks customize; large banks standardize"
The results largely track with the 2017 survey of community banks conducted by CSBS and the Federal Reserve, which found that community banks finance roughly the same dollar amount of small business loans as larger banks.
The survey is the foundation of a research report on small business lending by community banks, which will be released next year.
Six-Year Auto Loans Carry Higher Costs and Higher Default Rates  
The Consumer Financial Protection Bureau (CFPB) released a report on auto loan trends that found a sharp increase in riskier longer-term auto loans. According to the report, 42 percent of auto loans made in the last year carried a payback term of six years or more, compared to just 26 percent in 2009. The growth of these longer-term loans has largely come at the expense of five-year loans, which declined over the same period. The CFPB found that six-year auto loans are riskier-they cost more, are used by consumers with lower credit scores to finance larger amounts, and have higher rates of default.
"The move to longer-term auto loans is opening up more risk for consumers," said CFPB Director Richard Cordray. "These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car. Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan."
Auto loans are the third largest category of household debt for American consumers, behind mortgages and student loans, with almost 100 million auto loans outstanding totaling more than $1 trillion. For consumers who do not purchase a home, an auto loan may be the largest debt they will ever have to pay back. More than 90 percent of American households have a vehicle. And consumers obtain financing to purchase 86 percent of new vehicles and 53 percent of used vehicles.
The report is derived from the Bureau's Consumer Credit Trends dashboard with data from one of the three major credit reporting bureaus. The Bureau's research found that six-year auto loans are on the rise. Roughly 42 percent of new auto loans carry a six-year term or longer, whereas these loans were just 26 percent of the market in 2009. These longer-term loans are riskier than five-year auto loans.  
The Consumer Financial Protection Bureau launched the beta version of its platform for Home Mortgage Disclosure Act reporting. The beta release allows financial institutions to become familiar with the HMDA platform and determine whether their sample Loan Application Register data complies with Filing Instructions Guide reporting requirements.

The beta version allows financial institutions to establish test login credentials, upload sample HMDA files and validate data, receive edit reports, and conclude the test filing process. During the beta period, financial institutions may test and retest as often as desired.

All test accounts and data established and uploaded during the beta period will be removed from the system when filing opens in January.
Powell Nominated to Chair Fed Reserve               
President Trump nominated Federal Reserve Governor Jerome Powell to chair the Federal Reserve Board, and take the helm from current Chair Janet Yellen in February when her term ends. Powell, a Republican, is expected to receive Senate confirmation. Powell was nominated to the Board by President Barack Obama in 2012 and again in 2014. Powell currently is chairman of the Federal Reserve subcommittee on smaller regional and community banking.
Prior to serving on the Board, Powell was a visiting scholar at the Bipartisan Policy Center, and undersecretary of the Treasury to President George H. W. Bush. He also worked at the Carlyle Group.
In 2016, Powell delivered remarks at the CSBS-Federal Reserve community bank research conference. His remarks focused on community bank performance over a two-decade span, and explored possible reasons for the decline in the number of these institutions nationally.     
Next Gen Security: 3-D Secure 2.0                
by Alan Nevels, SVP, Card Risk and Merchant Services, ICBA Bancard
According to the U.S. Payments Forum's 2017 summer market snapshot, 45 to 50 percent of all U.S. credit and debit transactions are now chip-on-chip. Accordingly, the industry has experienced a much-welcomed reduction in counterfeiting and other types of card-present transaction fraud.
But just as one weak link in the chain strengthens, criminal elements look for another vulnerability to exploit. A December 2016 Visa Risk Services presentation, predicted that when chip-on-chip rates hit a breaking point of 50 percent, fraudsters would shift from EMV terminals to the card-not-present channel.
The recent Equifax hack illustrates all too plainly that fraudsters have deftly made this transition. Thankfully, events like the massive Equifax breach don't happen every day, but criminals are still making hay in the virtual space by employing pernicious tactics such as phishing and social engineering to steal individuals' names, card numbers and other sensitive personal information.
The Struggle.
It's been nearly two decades, since Visa and Mastercard introduced cardholder authentication solutions such as Verified by Visa and Secure Code to help issuers and merchants protect themselves in the online market space. The protocols for these solutions were licensed to other major card brands and became the standard script for authentication practices for years.
Unfortunately, they did little to stave off card-not-present fraud as participation was not compulsory for merchants and issuers. Issuers also had the additional burden of continuously encouraging cardholders to register for one of these services and cardholders were required to memorize yet another password (which they frequently forgot leading to cart abandonment at check out). In the end, no one was happy and issuers still bore most of the liability.
A New Hope.
 In 2014, Visa and Mastercard began working with the EMVco (Europay/Visa/ Mastercard) organization on a new industry authentication protocol titled 3-D Secure 2.0. The EMVco group consists of the six primary market players in the payments space and works to standardize card and merchant acceptance practices and rules worldwide.
3-D Secure 2.0 aims to reduce consumer friction and increase sales transaction approvals by using a risk-based model that looks at a multitude of factors including IP address, cardholder usage patterns and geographical location to analyze the likelihood of eCommerce card fraud.
"This new risk-based authentication solution leads to an 85 percent reduction in checkout time and 70 percent reduction in abandonment," notes Visa Risk's Lauren Rossi. "Battling U.S. CNP fraud detection is as much about reducing false declines as it is avoiding fraud," she says.
This next generation 3-D Secure 2.0 protocol will support multiple payment methods and payment tools. As the ecommerce space continues to mature and more cardholders embrace the convenience of online shopping and subscription services, it is increasingly important for both issuers and merchants to employ the latest and strongest available technologies to protect themselves from savvy fraudsters looking to attack the weakest links.