On January 13, the SEC filed a complaint against 11 former executives and board members of an Alabama-based federal savings bank and its holding company for allegedly participating in various schemes to mislead investors and bank regulators by concealing loan losses, and for violating reporting, internal controls, books-and-records, and proxy solicitation provisions. According to the SEC, the bank’s officers and directors extended, renewed, and rolled over loans, and/or used straw borrowers to “avoid properly classifying the loans as impaired and increasing the Allowance for Loan and Lease Losses (‘ALLL’).” The SEC’s complaint further alleges that in 2009 and 2010, the bank misstated its reported income by approximately 99% and 54%, respectively. The SEC is charging the defendants with, among other things, various counts of fraud, aiding and abetting fraud, circumvention of internal controls and falsified books and records, and false statements to accounts in violation of the Securities Act and the Exchange Act. Nine out of the 11 named defendants agreed to settle the charges against them, with penalties ranging from $100,000 to $250,000, and the remaining two defendants are contesting the charges in federal district court in Tallahassee, Florida.
FDIC Scott Strockoz to Serve as Acting National Director of Minority and Community Development Banking
On January 15, the FDIC announced that Robert W. Mooney, national director for Minority and Community Development Banking, retired at the end of 2015. Scott D. Strockoz will serve as acting national director for Minority and Community Development Banking. Strockoz currently serves as deputy regional director in the New York Region and oversees examination activities regarding financial institutions’ compliance with consumer protection, fair lending, and community reinvestment laws and regulations. Strockoz “holds examiner commissions in both risk management and consumer protection and has additionally served as review examiner, field supervisor, acting regional director, and acting associate director, Compliance and Consumer Protection.”
GAO Publishes Report Regarding the Impact of Dodd-Frank Regulations on Community Banks, Credit Unions, and Systemically Important Institutions
On December 30, the United States Government Accountability Office (GAO) released its fifth report mandated by Section 1573(a) of the Department of Defense and Full-Year Continuing Appropriations Act of 2011 (Act), which amended Dodd-Frank, and requires the GAO to annually review financial services regulations, including those of the CFPB. The report reviews 26 Dodd-Frank rules that became effective from July 23, 2014 through July 22, 2015 to examine whether the agencies conducted the required regulatory analyses and coordination. In addition, it examines nine Dodd-Frank rules that were effective as of October 2015 to determine their impact on community banks and credit unions. Finally, the report assesses Dodd-Frank’s impact on large bank holding companies. The GAO found that the agencies conducted the required regulatory analyses for rules issued under Dodd-Frank and reported required coordination. In addition, surveys of community banks and credit unions suggest that the Dodd-Frank rules under review have resulted in an increased compliance burden, a decline in certain business activities in some cases (e.g., loans that are not qualified mortgages), and moderate to minimal initial reductions in the availability of credit. Although “regulatory data to date have not confirmed a negative impact on mortgage lending,” “these results do not necessarily rule out significant effects or the possibility that effects may arise in the future.” Finally, the GAO concluded that the full impact of Dodd-Frank on large bank holding companies remains uncertain, but summarized the results of certain analyses in the report.
On January 5, the Financial Accounting Standards Board (FASB) issued a new accounting standard which “‘is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments.’” The new Accounting Standards Update (ASU) impacts public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The new guidance is intended to make targeted improvements to existing GAAP by, among several other things, generally only requiring that changes in the fair value of equity investments be recorded in net income and requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The ASU will take effect for public companies for fiscal years beginning after December 15, 2017 (including interim periods within those fiscal years), and for private companies, not-for-profit organizations, and employee benefit plans for fiscal years beginning after December 15, 2018 (and for interim periods within fiscal years beginning after December 15, 2019). Early adoption of certain provisions is permitted.
On December 17, the New York DFS announced an enforcement action against a New York branch of a Pakistan-based bank. The Federal Reserve Bank of New York (FRBNY) and the DFS recently conducted an examination of the branch and found significant risk management and compliance failures with regard to state and federal laws, rules, and regulations relating to anti-money laundering (AML) compliance. Under the terms of the DFS’s order, the branch agreed to reform its policies and procedures to ensure compliance with AML laws. Per the order, the bank must submit to the DFS, within 60 days of the order, a number of written programs regarding its (i) corporate governance and management oversight; (ii) BSA/AML compliance review; (iii) customer due diligence; and (iv) suspicious activity monitoring and reporting. The branch must also hire an independent third-party approved by the DFS and the FRBNY to review the effectiveness of the bank’s compliance program, and to prepare a written report of its findings, conclusions, and recommendations for the program. Because the branch’s compliance with OFAC regulations was insufficient, the order also mandates that the bank retain an independent third-party to examine its U.S. dollar-clearing transactions between October 2014 and March 2015. Significantly, the order does not require the branch to pay a civil money penalty.
On October 28, the New York DFS resolved an enforcement action with a New York State-charted bank for alleged violations of state banking law. The DFS alleged that the bank hired a former New York Federal Reserve Bank examiner and permitted him to work on matters for an entity that the employee had examined while at the New York Fed, in violation of a notice of post-employment restrictions from the New York Fed. The DFS also alleged that the employee obtained confidential regulatory or supervisory information from a now former New York Fed employee and distributed the information to a Managing Director at the bank for the purpose of advising the entity. In addition to the bank’s alleged failure to screen the employee from working on matters related to the entity he had examined, the DFS’s order alleges that the bank failed to “provide training to personnel regarding what constituted confidential supervisory information and how it should be safeguarded.” Under the settlement terms, the bank will (i) pay a civil money penalty of $50 million to the DFS; (ii) reform its policies and procedures to ensure the proper handling of confidential supervisory information and the monitoring of assignments of former government employees; and (iii) not re-hire the bank employee and Managing Director, who had been terminated as result of the matter.
On September 28, the Federal Reserve, the FDIC, and the OCC announced that the latest outreach meeting under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) will be held on October 10 in Chicago, Illinois. The meeting will feature panel presentations from industry insiders and consumer advocates. Senior officials from the Federal Reserve, OCC, and FDIC are also scheduled to attend. This meeting will be the fifth of six outreach meetings focused on identifying outdated or burdensome regulatory requirements imposed on financial institutions. The sixth and final meeting is expected to take place on December 2 in Washington, D.C. Previous InfoBytes coverage on EGRPRA can be found here.
On July 24, OCC Comptroller Curry delivered remarks before the New England Council in Boston, MA regarding the risks that financial institutions face today. Rising interest rates and regulatory compliance were two of the three risks discussed. Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”[l]oans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. Recognizing the impact that Dodd-Frank continues to have on banks, Curry said that financial institutions face two categories of risk from new regulations: (i) “banks run afoul of the new regulations, possibly damaging their reputations and subjecting themselves to regulatory penalties”; and (ii) banks devote their time and money to regulatory compliance, rather than putting those resources toward serving their customers and communities. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment and the creation of a Cybersecurity and Critical Infrastructure Working Group, which was designed to (i) increase cybersecurity awareness; (ii) promote best practices; and (iii) strengthen regulatory oversight of cybersecurity readiness. Curry noted, however, that information-sharing is just as important as self-assessment and supervisory oversight: “We strongly recommend … that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information.” Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one: “By promoting the discovery of common interests and common responses to the risks that you face in your businesses and we all face together, you provide an invaluable service to New England and to the United States.”
On June 18, FinCEN’s Associate Director for Enforcement, Stephanie Brooker, delivered remarks at the Bank Secrecy Act Conference, focusing on three main areas: (i) BSA filing trends, the value of BSA data, and compliance development in the casino industry over the past year; (ii) FinCEN’s enforcement approach and recent enforcement developments; and (iii) the significance of establishing and maintaining a culture of compliance throughout the business and compliance sides of casinos and card clubs. In addition, Brooker noted certain principles at the core of FinCEN’s enforcement program: (i) transparency in the agency’s rationale behind its enforcement actions; (ii) accountability, ensuring that financial institutions, and any individual related to the financial institution, take responsibility for violations of the BSA; and (iii) giving credit where credit is due by considering an institution’s “documented improvements in AML compliance over time.” Finally, Brooker stressed that in order for a financial institution to successfully maintain a culture of compliance, its business side and business leaders must take AML controls and BSA compliance seriously, meaning that “every casino employee, from the top down, views AML compliance as part of his or her responsibility.”
On June 1, a Boston-based international financial services holding company and its banking subsidiary agreed to address deficiencies in how they manage compliance risks with respect to their BSA/AML compliance program. The Agreement, entered into with the Federal Reserve Bank of Boston and the Massachusetts Division of Banks, requires both entities to submit a written plan outlining their efforts to improve their compliance with OFAC and internal controls, customer due-diligence procedures, and suspicious activity monitoring and reporting, among other things. In addition, the banking subsidiary must hire an independent third-party to review account and transaction activity during a specified period to ensure suspicious activity was properly identified and reported.
In a separate enforcement action, the Federal Reserve Bank of Chicago entered into an agreement on May 26 with an Illinois-based financial services company, requiring the parent company and its banking subsidiary to, among other things, submit written plans to (i) strengthen its BSA/AML compliance risk management program; and (ii) “ensure the identification and timely, accurate, and complete reporting” of suspicious transactions to the appropriate law enforcement and supervisory [banking] authorities.” No civil money penalties were imposed in either enforcement action.
On May 21, the FDIC’s Division of Depositor and Consumer Protection is scheduled to host a teleconference that will focus on the implementation of the new mortgage rules issued by the CFPB in 2013. According to the FDIC, officials from the banking regulator will discuss findings and highlight best practices that its examiners have noted during initial examinations in the first year since the rules became effective in 2014. Registration is required, and will begin at 2:00 p.m. EST.
On April 14, the OCC issued the “Real Estate Settlement Procedures Act” booklet as part of the Comptroller’s Handbook, which is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations (collectively, “banks”). The revised booklet, which replaces a similarly titled booklet issued in October 2011, reflects updated guidance relating to mortgage servicing and loss mitigation procedures resulting from the multiple amendments made to Regulation X over the past several years. Notable revisions reflected in the revised booklet include: (i) the transfer of rulemaking authority for Regulation X from HUD to the CFPB; (ii) new requirements relating to mortgage servicing; (iii) new loss mitigation procedures; (iv) prohibitions against certain acts and practices by servicers of federally related mortgage loans with regard to responding to borrower assertions of error and requests for information; and (v) updated examination procedures for determining compliance with the new servicing and loss mitigation rules. The OCC notified its applicable supervised financial institutions of the changes affecting all banks that engage in residential mortgage lending activities by distributing OCC Bulletin 2015-25.
OCC Revises Guidance Regarding Consumer Protection Requirements to Overdraft Lines and Protection Services
As previously reported in our March 11 Special Alert Update, on March 6, 2015, the OCC issued its revised “Deposit-Related Credit” booklet (“DRC booklet”) of the Comptroller’s Handbook, which replaced the “Deposit-Related Consumer Credit” booklet issued on February 11, 2015 (previously covered in this Special Alert). While the new booklet covers the same products – check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances – the OCC made significant amendments to scale back the provisions of the prior version. Specifically, the new DRC booklet no longer contains supervisory principles that could be read to require that banks provide substantive consumer protections that are not currently required by the applicable consumer protection regulations. Read more…
On December 24, a Maryland-based bank entered into an FDIC consent order involving alleged deficiencies in its BSA/AML compliance program. The consent order requires that the bank’s board of directors increase its oversight of the bank’s BSA compliance program. In addition, under the consent order, the bank must (i) appoint a qualified BSA officer and (ii) conduct a retrospective review of currency transaction reports beginning in May 2013 until the effective date of the consent order to determine whether transactions were properly identified and reported.
On December 2, Fed Governor Brainard delivered remarks at the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Outreach Meeting in California. Governor Brainard noted the significance of safety and soundness in the banking system, but noted that some Dodd-Frank regulations should target only larger institutions so that undue burdens are not placed on community banks: “Applying a one-size-fits-all approach to regulations may produce a small benefit at a disproportionately large compliance cost to smaller institutions.” The EGRPRA review, conducted every 10 years, provides an opportunity for federal financial regulators to consider whether current regulations are outdated, unnecessary, or unduly burdensome.