FINRA Targets Brokers’ Routing Of Orders

On July 8, FINRA released a targeted examination letter it sent to 10 firms to assess their compliance with requirements related to order routing and execution quality of customer orders in exchange listed stocks during the period of January 1, 2014 to present. The letters include numerous requests for information, including requests that each firm explain: (i) how it uses reasonable diligence to ascertain the best market for orders that the firm routes for execution to an exchange, or broker-dealer, so that the resultant price is as favorable as possible for its customer under prevailing market conditions; (ii) how the firm’s exchange order-routing decisions are made for customer non-marketable, customer market, and marketable limit orders; and (iii) how the firm reviews the execution quality of such orders. The letters also include requests related to each firm’s use of the “Smart Order Router.”

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CFPB Deputy Director’s Remarks May Indicate Evolving Approach To Mortgage Rules Enforcement

On June 18, CFPB Deputy Director Steve Antonakes opened the CFPB’s first public Consumer Advisory Board (CAB) meeting with remarks about implementation of the CFPB’s mortgage rules and the Bureau’s approach to enforcing those rules.

Over the past year, the CFPB has attempted to publicly outline and clarify its expectations for mortgage originators and servicers as those companies seek to comply with a host of new rules and requirements while continuing to face significant market challenges. The CFPB’s initial public position, particularly with regard to the new servicing rules, was 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.” Read more…

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House Passes Points And Fees Bill; Financial Services Committee Approves Additional CFPB Bills

On June 9, the House passed by voice vote H.R. 3211, the Mortgage Choice Act of 2013. The bill would amend TILA’s definition of “points and fees” for purposes of the CFPB’s Ability to Repay and HOEPA rules to exclude from the definition insurance held in impound accounts and amounts received by affiliated companies as a result of their participation in an affiliated business arrangement. The bill now moves to the Senate where a similar bill was introduced last year by Senator Joe Manchin (D-WV) but has not yet been considered by the Senate Banking Committee. Later in the week, the House Financial Services Committee approved numerous additional bills related to the CFPB, including:  (i) H.R. 4804, which would establish certain requirements for CFPB examinations, including prohibiting the use of enforcement attorneys; (ii) H.R. 4811, which would establish standards for CFPB guidance, including a notice and comment period, and would declare the CFPB’s fair lending auto finance guidance to have no force or effect; and (iii) H.R. 3770, which would create an independent inspector general for the CFPB.

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OCC Announces Bank Supervision Changes

On May 28, the OCC announced “significant” changes to its large bank supervisory process and its large bank examination force. The OCC plans to “expand the organization, functions, and responsibilities of its large bank lead expert program to improve horizontal perspective and analysis, systemic risk identification, quality control and assurance, and resource prioritization.” The OCC also will establish a formal program under which large bank examiners will rotate to another large bank every five years in cities with multiple large banks. The changes come in response to an international peer review initiated by the OCC. The OCC released a summary of the supervision peer review recommendations and the OCC’s responses, which describe a number of other supervisory changes including, among others: (i) formalizing an enterprise risk management framework that will involve “developing a risk appetite statement, creating a decision-tree process, and enhancing the OCC’s existing National Risk Committee framework and processes”; and (ii) expanding an ongoing review of Matters Requiring Attention “to enhance and standardize MRA definitions, methods for communication, resolution processes, establish consistent tracking mechanisms, and develop a consistent examiner reference guide.” The OCC declined to implement other recommended changes, including, for example, creating more flexibility within the CAMELS rating system or developing potential alternatives to CAMELS.

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New York Plans Targeted Bank Cybersecurity Examinations

On May 6, New York Governor Andrew Cuomo released a report on bank cybersecurity preparedness and directed the New York State Department of Financial Services (DFS) to conduct targeted cybersecurity preparedness assessments of the DFS-regulated banks. The DFS is revising its examination procedures to add questions to assess IT management and governance, incident response and event management, access controls, network security, vendor management, and disaster recovery. DFS plans to release additional details about the timing and content of these examination procedures in the coming weeks. The report follows a year-long survey of 154 DFS-regulated banks, which revealed that “most institutions experienced intrusions or attempted intrusions into their IT systems over the past three years.” The review revealed that third-party payment processor breaches were reported by 18% and 15% of small and large institutions, respectively, and that large institutions also cited mobile banking exploitation, ATM skimming/point-of-sale schemes), and insider access breaches. Last year, the DFS announced a similar inquiry into cyber preparedness at insurance companies it regulates.

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CFPB Report Recaps Fair Lending Activities

On April 30, the CFPB published its second annual report to Congress on its fair lending activities. According to the report, in 2013 federal regulators referred 24 ECOA-related matters to the DOJ—6 by the CFPB—as opposed to only 12 referrals in 2012. The report primarily recaps previously announced research, supervision, enforcement, and rulemaking activities related to fair lending issues, devoting much attention to mortgage and auto finance.  However, the Bureau notes that it is conducting ongoing supervision and enforcement in other product markets, including credit card lending. The Bureau also identifies the most frequently cited technical Regulation B violations.   Read more…

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Banking Agencies Issue Revised CRA Exam Procedures

On April 18, the OCC, FDIC, and Federal Reserve Board released revised Community Reinvestment Act (CRA) examination procedures applicable to institutions with total assets greater than $1.202 billion as of December 31 of either of the previous two calendar years. The procedures incorporate revisions to the CRA interagency questions and answers issued in November 2013. Those revisions generally were intended to: (i) clarify how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution’s assessment area; (ii) provide guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds; (iii) clarify the consideration of certain community development services, such as service on a community development organization’s board of directors; (iv) address the treatment of loans or investments to organizations that, in turn, invest those funds and use only a portion of the income from their investment to support a community development purpose; and (v) clarify that community development lending performance is always a factor considered in a large institution’s lending test rating.

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Federal Reserve Board Revises Guidance For Examiners On Loan Sampling

On April 18, the Federal Reserve Board issued SR 14-4 which updates the Federal Reserve’s loan sampling expectations for state member bank and credit extending nonbank subsidiaries of banking organizations with $10-$50 billion in total consolidated assets. Depending on the structure and size of subsidiary state member banks, the guidance permits examiners to apply the guidance applicable to smaller state member banks when a bank’s subsidiary’s total assets are below $10 billion. The guidance (i) details the loan sampling methodology to be employed by Reserve Banks during the supervisory process; (ii) calls for documentation of loan sample selection methods in scoping memoranda and in the confidential section of the report of examination; and (iii) outlines expectations for following up on examinations with adverse findings. The guidance supersedes the examiner loan sampling expectations described in SR 94-13, “Loan Review Requirements for On-site Examinations.”

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SEC Announces Cybersecurity Examination Initiative

On April 15, the SEC’s Office of Compliance Inspections and Examinations announced that it will be conducting cybersecurity examinations of more than 50 registered broker-dealers and registered investment advisers. The examinations will assess each firm’s cybersecurity preparedness and collect information about the industry’s recent experiences with certain types of cyber threats. Specifically, examiners will focus on (i) cybersecurity governance; (ii) identification and assessment of cybersecurity risks; (iii) protection of networks and information; (iv) risks associated with remote customer access and funds transfer requests; (v) risks associated with vendors and other third parties; (vi) detection of unauthorized activity; and (vii) and experiences with certain cybersecurity threats. The SEC included with the announcement a sample document and information request it plans to use in this examination initiative.

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Federal Reserve OIG Criticizes CFPB’s Supervision Program

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…

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FDIC Releases Interagency Mortgage Examination Procedures

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.”

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SEC Examinations To Target Never-Before Examined Investment Advisers

On February 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched a previously-announced initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE plans to conduct examinations of a “significant percentage” of advisers that have not been examined since they registered with the SEC. The examinations will focus on compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. The SEC plans to host regional meetings for investment advisers to learn more about the examination process.

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OCC Updates Mortgage Handbook, Retirement Plan Products Handbook

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.

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CFPB Publicly Announces Changes to Exam Reports, Identifies Mortgage Servicing Exam Findings

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.

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CFPB Proposes To Supervise Larger Nonbank International Money Transmitters

On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.

The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.

Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.

A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.

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