Over the past week, Virginia Governor Terry McAuliffe signed several bills impacting banks and certain consumer finance providers. The first bill, HB 358 repealed a state law that that barred out-of-state banks from opening de novo branches in Virginia unless the bank’s home state provided reciprocal access to Virginia banks. The change will allow out-of-state banks to establish branches in Virginia on the same basis as state-chartered banks. A second banking bill, HB 1062, provides that an existing statutory provision requiring the Virginia State Corporation Commission to ascertain that certain minimum capital stock requirements are met prior to issuing a certificate of authority to a bank does not apply to the Commission’s issuance of such a certificate to a bank holding company or to a resulting bank in connection with certain types of mergers involving the holding company and its subsidiary bank. A third bill, HB 69, amends state law to expand the types of services that may be provided under an extended motor vehicle service contract and to authorize the Board of Agriculture and Consumer Services to designate additional services that may be provided under an extended service contract. The bill also provides that extended service contracts are not insurance subject to state regulation as such. The above approved bills will take effect on July 1, 2014. Finally, the Governor has not yet approved a bill passed by the General Assembly, HB 954, which would permit the State Corporation Commission to issue transitional mortgage loan originator licenses.
On April 1, the Federal Reserve Board’s Office of Inspector General (OIG), which also is responsible for auditing the CFPB, issued a report that is critical of the CFPB’s supervisory activities and recommends that the CFPB take specific actions to strengthen its supervision program. The report shares concerns raised by entities having been through the examination process.
The report covers the CFPB’s supervisory activities from July 2011 through July 2013, including 82 completed examinations (excluding baseline reviews), which yielded 35 reports of examination and 47 supervisory letters. Of those 82 completed examinations, 63 were of depository institutions, and 19 were of nondepository institutions.
Among the findings, the OIG concludes that: Read more…
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.
On March 4, the UK FCA released the results of its most recent review of sales incentives at retail financial firms. The FCA’s review revealed that retail banks have made progress in changing their financial incentive structures in response to the FCA’s supervisory focus on the issue starting in September 2012, which led to new guidance issued in January 2013. The FCA’s initial focus on the issue derived from its concerns about incentive structures that, among other things, allegedly fueled the sale of payment protection plans and other add-on products. Despite the broad progress, the FCA reports that roughly one in 10 firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing the risk properly at the time of the FCA’s assessment. It believes firms should concentrate on, among other things (i) checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk; (ii) better monitoring behavior in face-to-face sales conversations; and (iii) managing risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused. The FCA states that given the progress made, it is not proposing any rule changes at this time, but it intends to keep financial incentives on its agenda for 2014.
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.”
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.”
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…