On February 25, the FDIC issued FIL-9-2014 to notify supervised institutions of new consumer compliance examination procedures for the mortgage rules issued pursuant to the Dodd-Frank Act, that took effect nearly two months ago. FDIC examiners will use the revised interagency procedures to evaluate institutions’ compliance with the new mortgage rules. The FDIC states that during initial compliance examinations, FDIC examiners will expect institutions to be familiar with the mortgage rules’ requirements and have a plan for implementing the requirements. Those plans should contain “clear timeframes and benchmarks” for updating compliance management systems and relevant compliance programs. “FDIC examiners will consider the overall compliance efforts of an institution and take into account progress the institution has made in implementing its plan.”
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there’s no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
Federal Reserve Plans Regular Reporting On Bank Applications, Outlines Common Issues Resulting In Application Withdrawals
On February 24, the Federal Reserve Board announced in SR 14-2 that it will start publishing a semi-annual report to provide certain information on bank applications and notices filed with the Federal Reserve. The Board stated that the report will include statistics on the length of time taken to process various applications and notices and the overall volume of approvals, denials, and withdrawals. The report also will provide the primary reasons for withdrawals. The first report will be released in the second half of 2014 and will include filings acted on from January through June 2014. The letter also describes common issues identified by the Federal Reserve that have led to recent withdrawal of applications, including (i) less-than-satisfactory supervisory rating(s) for safety and soundness, consumer compliance, or CRA; (ii) inadequate compliance with the Bank Secrecy Act; and (iii) concerns regarding the financial condition or management of the proposed organization.
CFPB Supplements Consumer Reporting Guidance, Holds Consumer Advisory Board Meeting, Issues Consumer Reporting Complaints Report
On February 27, the CFPB issued supplemental guidance related to consumer reporting and held a public meeting focused on consumer reporting issues. The CFPB also released a report on consumer reporting complaints it has received.
The CFPB issued a supervision bulletin (2014-01) that restates the general obligations under the Fair Credit Reporting Act for furnishers of information to credit reporting agencies and “warn[s] companies that provide information to credit reporting agencies not to avoid investigating consumer disputes.” It follows and supplements guidance issued last year detailing the CFPB’s expectations for furnishers.
The latest guidance is predicated on the CFPB’s concern that when a furnisher responds to a consumer’s dispute, it may, without conducting an investigation, simply direct the consumer reporting agency (CRA) to delete the item it has furnished. The guidance states that a furnisher should not assume that it ceases to be a furnisher with respect to an item that a consumer disputes simply because it directs the CRA to delete that item. In addition, the guidance explains that whether an investigation is reasonable depends on the circumstances, but states that furnishers should not assume that simply deleting an item will generally constitute a reasonable investigation.
The CFPB promises to continue to monitor furnishers’ compliance with FCRA regarding consumer disputes of information they have furnished to CRAs. Furnishers should take immediate steps to ensure they are fulfilling their obligations under the law. Read more…
Federal Reserve Board Finalizes Enhanced Prudential Standards For Large Bank Holding Companies, Foreign Banks
On February 18, the Federal Reserve Board issued a final rule that incorporates elements of two previously proposed rules related to U.S. bank holding companies with assets of $50 billion or more and foreign banking organization with assets of $50 billion or more. For covered domestic bank holding companies, the final rule (i) incorporates as an enhanced prudential standard previously-issued capital planning and stress testing requirements; and (ii) imposes enhanced risk-management, including liquidity risk-management standards. The rule further imposes a 15-1 debt-to-equity limit for companies that pose a grave threat to U.S. financial stability, as determined by the FSOC. For covered foreign banking organizations, the rule (i) implements enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, stress testing requirements, and the debt-to-equity limit for FSOC-designated companies; and (ii) requires foreign banking organizations with U.S. non-branch assets of $50 billion or more to form a U.S. intermediate holding company (IHC) and imposes the same enhanced requirements on the IHC. The rule also establishes enterprise-wide risk-committee requirements for publicly traded domestic bank holding companies with total consolidated assets of $10 billion or more and for publicly traded foreign banking organizations with total consolidated assets of $10 billion or more, and implements stress-testing requirements for foreign banking organizations and foreign savings and loan holding companies with total consolidated assets of more than $10 billion. The final rule does not apply to non-bank financial firms designated as systemically important by the FSOC. The rule takes effect on June 1, 2014, but covered U.S. bank holding companies have until January 1, 2015 to comply. Foreign banking organizations must submit an implementation plan by January 1, 2015, but have until July 1, 2016 to comply. The final rule generally defers application of the leverage ratio to IHCs until 2018.
On February 14, the OCC issued Bulletin 2014-02, which clarifies supervisory expectations for national banks and federal savings associations regarding secured consumer debt discharged in Chapter 7 bankruptcy proceedings. The guidance describes (i) the analysis necessary to “clearly demonstrate and document that repayment is likely to occur,” which would preclude any charge-off as required by the Uniform Retail Credit Classification and Account Management Policy; and (ii) when a bank may consider post-discharge payment performance as evidence of collectability and when this performance demonstrates both capacity and willingness to repay the full amounts due. The OCC states that the repayment analysis should document (i) the existence of orderly repayment terms for structured collection of the debt without the existence of undue payment shock or the need to refinance the balloon amount; (ii) a history of payment performance that demonstrates the borrower’s ongoing commitment to satisfy the debt; and (iii) the consideration of post-discharge capacity to make future required payments. The guidance provides standards for post-discharge repayment capacity. Further, the guidance allows a bank to consider post-discharge payment performance as evidence of collectability, and states that the analysis can be conducted at a pool or individual level provided the bank considers whether (i) monthly payment includes both principal and interest that fully amortizes the remaining debt; (ii) sustained performance demonstrates ongoing capacity and willingness to repay post-discharge; and (iii) collateral levels indicate the bank is likely to recover the full amount due even if payments cease.
On February 19, CFPB Deputy Director Steve Antonakes spoke at the Mortgage Bankers Association’s annual servicing conference and detailed the CFPB’s expectations for servicers as they implement the new servicing rules that took effect last month.
Mr. Antonakes’s remarks about the CFPB’s plans to supervise and enforce compliance with the new rules are the most assertive to date. Until now, the CFPB’s public position has been that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Mr. Antonakes clarified this position, stating that “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Default Servicing and Foreclosures
Specifically, the CFPB expects that, “in these very early days,” servicers will (i) identify and correct “technical issues”; (ii) “conduct outreach to ensure that all consumers in default know their options”; and (iii) “assess loss mitigation applications with care, so that consumers who qualify under [a servicer’s] own standards get the loss mitigation that saves them – and the investor – from foreclosure.” Mr. Antonakes acknowledged that “foreclosures are an important part of the business, but they shouldn’t happen unless they’re necessary and they must be done according to relevant law. We expect the new rules to go a long way to reduce consumer harm for all consumers with mortgages, especially as these rules work in concert with the existing prohibition against unfair, deceptive, and abusive practices.”
Mr. Antonakes specifically detailed expectations concerning mortgage servicing rights transfers. He stated that the CFPB expects servicers to “pay exceptionally close attention to servicing transfers and understand [that the CFPB] will as well. . . . Our rules mandate policies and procedures to transfer ‘all information and documents’ in order to ensure that the new servicer has accurate information about the consumer’s account. We’re going to hold you to that. Servicing transfers where the new servicers are not honoring existing permanent or trial loan modifications will not be tolerated. Struggling borrowers being told to pay incorrect higher amounts because of the failure to honor an in-process loan modification – and then being punished with foreclosure for their inability to pay the incorrect amounts – will not be tolerated. There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”
On February 7, the OCC issued an updated Mortgage Banking booklet of the Comptroller’s Handbook. The revised booklet (i) provides updated guidance to examiners and bankers on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management; (ii) makes wholesale changes to the functional areas of production, secondary marketing, servicing, and mortgage servicing rights; and (iii) addresses recent CFPB amendments to Regulation X and Regulation Z, as well as other Dodd-Frank related statutory and regulatory changes. The updated booklet replaces a similarly titled booklet issued in March 1996, as well as Section 750 (Mortgage Banking) issued in November 2008 as part of the former OTS Examination Handbook. On February 12, the OCC issued a revised Retirement Plan Products and Services booklet of the Comptroller’s Handbook that (i) updates examination procedures and groups them by risk; (ii) updates references and adds a list of abbreviations; (iii) adds references to recent significant U.S. Department of Labor regulations and policy issuances; (iv) adds a discussion of Bank Secrecy Act/anti-money laundering and Regulation R; and (v) adds a discussion of board and senior management responsibilities regarding oversight of risk management.
On January 29, the OCC announced that Molly Scherf will serve as Deputy Comptroller for Large Bank Supervision with responsibility for overseeing the Large Bank lead experts, shared national credit, data analytics, and systems teams. Her new role will involve working with policy, midsize, and community bank supervision, and legal departments within the OCC as well as with domestic and international regulatory peers. Ms. Scherf joined the OCC in 1990 and brings 23 years of bank supervision experience across institutions ranging from $50 million to $2 trillion in assets. She most recently served as Large Bank Lead Expert for Governance and Enterprise Risk Management and previously served as a megabank Team Lead at Wells Fargo.
On January 30, the CFPB issued a new Supervisory Highlights report. The report publicly announces changes to the CFPB’s examination reports and supervisory letters. Beginning in January 2014 the CFPB is changing the format of the Examination Reports and Supervisory Letters (collectively referred to as reports) that it sends to supervised entities after conducting compliance reviews. The changes to the report templates aim to: (i) facilitate drafting by examiners; (ii) simplify reports and reduce repetition; and (iii) facilitate follow-up reporting by supervised entities about actions they take to address compliance management weaknesses or legal violations found at CFPB reviews.
The primary template changes include:
- Elimination of Recommendations. Any recommendations for improving currently satisfactory processes will be provided orally when examiners are on-site.
- Elimination of the list of CFPB team members participating in a review. Reports will continue to be signed by the Examiner in Charge and provide regional management contact information.
- Creation of a single section in the report that includes all of the items that the CFPB expects the entity to address when the review identifies violations of law or weaknesses in compliance management. This entire section will be referred to as “Matters Requiring Attention,” regardless of whether the CFPB is requiring specific attention by an entity’s Board of Directors. The CFPB will no longer include additional “Required Corrective Actions.” The entity receiving the report will be expected to furnish periodic progress reports to the CFPB about all Matters Requiring Attention. The frequency of reporting will be tailored to the specific matters in a report.
The report also provides “supervisory observations,” which are limited to mortgage servicing. In a section on non-public supervisory actions the report states recent supervisory activities have resulted in at least $2.6 million in remediation to consumers, and that these non-public supervisory actions generally have been the product of CFPB examinations, either through examiner findings or self-reported violations during an exam.
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
Special Alert: Federal Reserve Board Guidance on Managing Outsourcing Risks Mirrors Recent OCC Guidance
On December 5, 2013, the Federal Reserve Board (FRB or the Fed) issued Supervision and Regulation Letter 13-19, which details and attaches the Fed’s Guidance on Managing Outsourcing Risk (FRB Guidance). The FRB Guidance sets forth risks arising out of the use of service providers and the regulatory expectations relating to risk management programs. It is substantially similar to OCC Bulletin 2013-29, which the Office of the Comptroller of the Currency (OCC) issued on October 30, 2013.
The FRB Guidance supplements existing guidance relating to risks presented by Technology Service Providers (TSPs) to reach service providers that perform a wide range of business functions, including, among other things, appraisal management, internal audit, human resources, sales and marketing, loan review, asset and wealth management, procurement, and loan servicing.
While a complete roadmap of the FRB Guidance would be largely duplicative of our recent Special Alert relating to the OCC Bulletin 2013-29, key supervisory and enforcement themes emerge from a comparison of the two guidance documents. Like the OCC, the Fed signals broadly that failure to effectively manage the use of third-party service providers could “expose financial institutions to risks that can result in regulatory action, financial loss, litigation, and loss of reputation.” The Fed also emphasizes the responsibility of the Board of Directors and senior management to provide for the effective management of third-party relationships and activities. It enumerates virtually the same risk categories as the OCC, including compliance, concentration, reputational, operational, country, and legal risks, though its discussion of those risks is slightly less comprehensive.
The FRB Guidance makes clear that service provider risk management programs should focus on outsourced activities that are most impactful to the institution’s financial condition, are critical to ongoing operations, involve sensitive customer information, new products or services, or pose material compliance risk. While the elements comprising the service provider risk management program will vary with the nature of the financial institution’s outsourced activities, the Fed’s view is that effective programs usually will include the following: Read more…
On December 3, the CFPB Ombudsman’s Office submitted its second annual report to the Director of the CFPB. The report contains an update on the systemic recommendations made last year and new recommendations stemming from the Ombudsman’s review of (i) how the CFPB shares information, (ii) caller experience with the CFPB contact center, and (iii) the supervisory examination process. The Ombudsman’s recommendations relate primarily to further standardizing and clarifying what a financial entity may expect throughout the examination lifecycle and to ensuring industry and consumer access to CFPB information in a consistent and timely manner. According to the Ombudsman, the Bureau was receptive to all suggestions and feedback. Read more…
This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.
Some of the highlights include:
- Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
- Much of the discussion focused on potential alternatives to the current dealer markup system. The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
- There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences. Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups. When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
- Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines. The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same. The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
- Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.
Additional detail from each panel follows. Read more…
On November 6, the OCC issued two bulletins to announce an addition and revisions to the Comptroller’s Handbook. The OCC also rescinded certain Handbook provisions. Bulletin OCC 2013-30 adds to the Handbook the “Qualified Thrift Lender” (QTL) booklet, which includes the “Qualified Thrift Lending Test,” issued June 2002 as part of the Office of Thrift Supervision’s Examination Handbook. The revisions are statutory in nature and include, among other things, new language pursuant to the Dodd–Frank Act regarding QTL failure and the violation of HOLA section 5 and additional limitations in the payment of dividends. Bulletin OCC 2013-31 updates the “Insider Activities” booklet and provides guidance for examiners and bankers on how national banks and federal savings associations may legally and prudently engage in transactions with insiders. The booklet explains how to implement risk management processes that provide for the appropriate control and monitoring of insider activities and how examiners review and assess insider activities during the supervisory process.