Regulators Jointly Approve Final Risk Retention Rule

On October 22, coordinated by the Department of Treasury, six federal agencies – the Board of Governors, HUD, FDIC, FHFA, OCC, and SEC – approved a final rule requiring sponsors of securitized transactions, such as asset-backed securities (ABS), to retain at least 5 percent of the credit risk of the assets collateralizing the ABS issuance. The final rule, which largely mirrors the proposed rule issued in August 2013, defines a “qualified residential mortgage” (QRM) and exempts securitized QRMs from the new risk retention requirement. Government-controlled Fannie and Freddie are exempt from the rule. Most notably, the final rule’s definition of a QRM parallels with that of a qualified mortgage as defined by the CFPB. Further, initially part of the proposed rule, the final rule does not include down payment provisions for borrowers. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities, and two years after publication for all other types of securitized assets.

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CFPB And FDIC Develop Spanish-Language Tool To Stop Financial Exploitation of Older Adults

On October 7, the CFPB and the FDIC announced a Spanish-language version of Money Smart for Older Adults, a free financial resource tool intended to prevent the elder financial exploitation that is affecting millions of senior citizens each year. The English-language version, which “includes practical information that can be put to use right away,” was jointly developed by the two agencies last year. The Spanish-language participant/resource guide and power point slides can be downloaded for free at the FDIC’s website, or can be ordered as hard copies on the CFPB’s website.

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Prudential Regulators Seek Comments On Proposed CRA Questions And Answers

On September 8, the OCC, the FDIC, and the Federal Reserve Board released proposed revisions to the Interagency Questions and Answers Regarding Community Reinvestment. Specifically, the agencies propose to revise three questions and answers that address alternative systems for delivering retail banking service and provide additional examples of innovative or flexible lending practices. In addition, the proposal would revise three questions and answers addressing community development-related issues and add four new questions and answers – two of which address community development services, and two of which provide general guidance on responsiveness and innovativeness. Comments on the proposal are due by November 10, 2014.

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Prudential Regulators Finalize Liquidity Coverage Ratio Rule

On September 3, the OCC, the FDIC, and the Federal Reserve Board released a final rule establishing a minimum liquidity requirement for large and internationally active banking organizations. The rule will require banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, and such banking organizations’ subsidiary depository institutions that have assets of $10 billion or more, to hold high quality, liquid assets (HQLA) that can be converted easily into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the institution’s HQLA to its projected net cash outflow is its “liquidity coverage ratio,” or LCR. The Federal Reserve Board also is adopting a modified LCR for bank holding companies and savings and loan holding companies that do not meet these thresholds, but that have $50 billion or more in total assets. Bank holding companies and savings and loan holding companies with substantial insurance or commercial operations are not covered by the final rule. Relative to the proposal issued in October 2013, the final rule includes changes to the range of corporate debt and equity securities included in HQLA, a phasing-in of daily calculation requirements, a revised approach to address maturity mismatch during a 30-day period, and changes in the stress period, calculation frequency, and implementation timeline for the bank holding companies and savings and loan companies subject to the modified LCR. Covered U.S. firms will be required to be fully compliant with the rule by January 1, 2017. Specifically, covered institutions will be required to maintain a minimum LCR of 80% beginning January 1, 2015. From January 1, 2016, through December 31, 2016, the minimum LCR would be 90%. Beginning on January 1, 2017, and thereafter, all covered institutions would be required to maintain an LCR of 100%.

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Prudential Regulators Finalize Supplementary Leverage Ratio Rule

On September 3, the OCC, the FDIC, and the Federal Reserve Board released a final rule that modifies the definition of the denominator of the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee. The revisions to the supplementary leverage ratio apply to all banking organizations subject to the advanced approaches risk-based capital rule. The final rule modifies the methodology for including off-balance sheet items, including credit derivatives, repo-style transactions, and lines of credit, in the denominator of the supplementary leverage ratio. The final rule also requires institutions to calculate total leverage exposure using daily averages for on-balance sheet items and the average of three month-end calculations for off-balance sheet items. Certain public disclosures required by the final rule must be made starting in the first quarter of 2015, and the minimum supplementary leverage ratio requirement using the final rule’s denominator calculations is effective January 1, 2018.

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AABD Makes Suggestions to Regulatory Agencies Regarding The Burdens Placed On America’s Bank Directors

On September 2, David Baris, President of the American Association of Bank Directors (AABD) and a Partner at BuckleySandler LLP, and Richard Whiting, Executive Director of the AABD, submitted a comment letter to  the Nation’s federal bank regulatory agencies in connection with the OCC, the Board of Governors of the Federal Reserve System, and the FDIC’s (the Agencies) request for public comment on their review of “regulations to identify outdated, unnecessary or unduly burdensome regulations for insured depository institutions.” In 2006, the Agencies completed a similar review and the AABD determined it was an “unsatisfactory and flawed process,” and wants to ensure that the same mistakes are not made during this review. Specifically, the AABD urged that during this review, the Agencies should “review regulatory guidance in light of the practical effect of such guidance on the behavior of both bank board of directors and the Agencies.” On behalf of the AABD, Baris stated in a press release that the current laws, regulations and guidance “create a huge and counterproductive impact on bank directors that causes them to divert their attention away from the essential job of being a bank director – that is meeting their duty of care and loyalty by overseeing the institution.”  In an effort to address the effects of the “current regulatory system on the Nation’s bank board of directors,” the AABD’s letter included the following recommendations to the Agencies: (i) review current regulations and written guidance to determine their effect on bank directors; (ii) incorporate into their current procedures a requirement that “future regulatory actions consider the impact of proposed rules and guidance on bank directors and not add new burdens unless the benefits of the proposed action clearly outweighs the burdens place[d] on bank directors”; (iii) identify, consolidate, and clarify the provisions that place burdens on bank directors; and (iv) implement rules that allow the board of directors to “delegate management duties to management and rely reasonably on management.”

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Interagency Guidance Regarding Unfair Or Deceptive Credit Practices

On August 22, the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) issued interagency guidance regarding unfair or deceptive credit practices (UDAPs). The guidance clarifies that “the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible.” Notwithstanding the repeal of these rules, the agencies preserve supervisory and enforcement authority regarding UDAPs. Consequently, the guidance cautions that “depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.” The guidance also explains that the FTC Rule remains in effect for creditors within the FTC’s jurisdiction, and can be enforced by the CFPB against creditors that fall under the CFPB’s enforcement authority.

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Federal, State Mortgage-Related Investigations Yield Largest Ever Civil Settlement

On August 21, the DOJ announced that a large financial institution agreed to resolve federal and state mortgage-related claims through what the DOJ characterized as the largest ever civil settlement with a single entity. The agreement actually resolves numerous federal and state investigations related to various alleged practices conducted by the institution and certain former and current subsidiaries that it acquired during the financial crisis. Such allegations relate to the packaging, marketing, sale, arrangement, structuring, and issuance of RMBS and collateralized debt obligations (CDOs), as well as the underwriting and origination of mortgage loans. In total, the institution agreed to pay $9.65 billion in penalties and fines and provide $7 billion in relief to borrowers. Of the more than $9 billion in civil payments, $5 billion resolves several DOJ investigations related to RMBS and CDOs under FIRREA, as well as the allegedly fraudulent origination of loans sold to Fannie Mae and Freddie Mac or insured by the FHA. The origination investigations centered on alleged violations of the False Claims Act in the selling of, or seeking of government insurance for, loans alleged to be defective. Other penalty payments resolve RMBS-related claims by the SEC, the FDIC, and several states. In total, the state participants will receive nearly $1 billion, with California and New York obtaining the largest amounts at $300 million each. An independent monitor will be appointed to oversee the borrower relief provisions, which will require the institution to: (i) offer principal reduction loan modifications; (ii) make loans to “credit worthy borrowers struggling to obtain a loan”; (iii) make donations to certain communities harmed during the financial crisis; and (iv) provide financing for affordable rental housing. The institution also agreed to provide funding to defray any tax liability that will be incurred by borrowers who receive certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.

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FDIC Responds To Choke Point Scrutiny With Clarified TPPP Guidance

On July 28, the FDIC issued FIL-41-2014 to clarify its supervisory approach to bank relationships with third-party payment processors (TPPPs). In short, the letter removes the FDIC’s list of examples of merchant categories from its existing guidance and informational article. That list, which identified potential “high-risk” businesses, including firearms and ammunition merchants, coin dealers, and payday lenders, among numerous others, has been scrutinized and challenged by members of Congress in recent months. The new guidance explains the “lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to TPPPs, creating the misperception that the listed examples of merchant categories were prohibited or discouraged.” The FDIC’s letter continues to defend the list as “illustrative of trends identified by the payments industry at the time the guidance and article were released” and reasserts that it is the FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law.

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FDIC Proposes Changes to Assessments

On July 23, the FDIC proposed a rule to revise its assessments regulation. Specifically, the FDIC proposes changing the ratios and ratio thresholds for capital evaluations used in its risk-based deposit insurance assessment system to conform the assessments to the prompt corrective action capital ratios and ratio thresholds adopted by the prudential regulators. The proposal also would (i) revise the assessment base calculation for custodial banks to conform to the asset risk weights adopted by the prudential regulations; and (ii) require all highly complex institutions to measure counterparty exposure for deposit insurance assessment purposes using the Basel III standardized approach credit equivalent amount for derivatives and the Basel III standardized approach exposure amount for other securities financing transactions. The FDIC explains the changes are intended to accommodate recent changes to the federal banking agencies’ capital rules that are referenced in portions of the assessments regulation.Comments are due by September 22, 2014.

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Federal, State Authorities Obtain Another Major RMBS Settlement

On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.

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Federal, State Prudential Regulators Issue HELOC Guidance

On July 1, the OCC, the Federal Reserve Board, the FDIC, the NCUA, and the Conference of State Bank Supervisors issued interagency guidance on home equity lines of credit (HELOCs) nearing their end-of-draw periods. The guidance states that as HELOCs transition from their draw periods to full repayment, some borrowers may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values. As such, the guidance describes the following “core operating principles” that the regulators believe should govern oversight of HELOCs nearing their end-of-draw periods: (i) prudent underwriting for renewals, extensions, and rewrites; (ii) compliance with existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies; (iii) use of well-structured and sustainable modification terms; (iv) appropriate accounting, reporting, and disclosure of troubled debt restructurings; and (v) appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation processes. The guidance also outlines numerous risk management expectations, and states that institutions with a significant volume of HELOCs, portfolio acquisitions, or exposures with higher-risk characteristics should have comprehensive systems and procedures to monitor and assess their portfolios, while less-sophisticated processes may be sufficient for community banks and credit unions with small portfolios, few acquisitions, or exposures with lower-risk characteristics.

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FDIC Restricts Bank’s Card Businesses Pending BSA Compliance Enhancements

On June 5, the FDIC and a Delaware bank entered a consent order that prohibits the bank from entering into any new relationships with third-party prepaid card processors or prepaid card program managers until the FDIC approves a written report from the bank that details the steps taken by the bank to (i) implement new BSA compliance policies and procedures; (ii) improve staff training; (iii) implement controls sufficient to mitigate BSA and safety and soundness risk associated with prepaid card, credit card merchant acquiring, and ACH activities; and (iv) perform a BSA risk assessment. The order similarly restricts the bank’s activities related to credit card merchant acquiring and ACH merchant payment processing. The order does not prohibit the bank from issuing prepaid cards through existing distribution channels under existing contracts with third-parties, but does restrict certain activities related to existing credit card and ACH processing activities. In addition, the bank must (i) retain and designate BSA and OFAC officers; (ii) conduct a suspicious activity reporting look-back review; and (iii) submit periodic progress reports. Finally, the order requires increased board supervision of the bank’s BSA compliance program and mandates the creation of a board-level BSA committee.

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Prudential Regulators Propose Changes To Timing Of Stress Tests

On June 12, the Federal Reserve Board and the OCC separately released proposed rules that would push back by 90 days the start date of the stress test cycles and the deadlines for submitting stress test results. The regulators propose making the new schedules effective beginning with the 2015-2016 cycles. On June 13, the FDIC proposed a rule to similarly shift the stress test cycles. In addition, the Federal Reserve’s proposed rule would (i) modify the capital plan rule to limit a large bank holding company’s ability to make capital distributions to the extent that its actual capital issuances were less than the amount indicated in its capital plan; (ii) clarify the application of the capital plan rule to a large bank holding company that is a subsidiary of a U.S. intermediate holding company of a foreign banking organization; and (iii) make other technical clarifying changes. Comments on the Federal Reserve’s proposal are due by August 11, 2014. Comments on the OCC’s and the FDIC’s proposals are due 60 days after their publication in the Federal register.

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Payday Lenders Sue Government Over Operation Choke Point

On June 5, the Community Financial Services Association and one of its short-term, small dollar lender members filed a lawsuit in the U.S. District Court for the District of Columbia claiming the FDIC, the OCC, and the Federal Reserve Board have participated in Operation Choke Point “to drive [the lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.” The complaint asserts that the operation has resulted in over 80 banking institutions terminating their business relationships with CFSA members and other law-abiding payday lenders. The lenders claim that the regulators are using broad statutory safety and soundness authority to establish through agency guidance and other means broad requirements for financial institutions, while avoiding the public and judicial accountability the regulators would otherwise be subject to if they pursued the same policies under the Administrative Procedures Act’s (APA) notice and comment rulemaking procedures. The lenders assert that in doing so, the regulators have violated the APA by (i) failing to observe its rulemaking requirements; (ii) exceeding their statutory authority; (iii) engaging in arbitrary and capricious conduct; and (iv) violating lenders’ due process rights. The lenders ask the court to declare unlawful certain agency guidance regarding third-party risk and payment processors and enjoin the agencies from taking any action pursuant to that guidance or from applying informal pressure on banks to encourage them to terminate business relationships with payday lenders.

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