On May 14, Senator Elizabeth Warren (D-MA) sent a letter to Federal Reserve Board Chairman Ben Bernanke, Attorney General Eric Holder, and SEC Chairman Mary Jo White seeking additional information about the agencies’ respective approach to enforcement actions. Specifically, the letter asks whether the agencies have conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation to obtain an admission. The letter notes that the OCC recently informed Ms. Warren that it does not have any such internal research or analysis and reiterates Ms. Warren’s concern that “if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial . . . the regulator has a lot less leverage in settlement negotiations.
Federal Reserve Board, Illinois Regulator Issue Joint Enforcement Action Against U.S. Subsidiaries of Foreign Bank, OCC Issues Parallel Action
On May 17, the Federal Reserve Board released an April 29, 2013 written agreement between the Federal Reserve Board, an Illinois state regulator, a foreign bank, and its U.S. bank holding company subsidiary (the Holding Company) regarding certain Bank Secrecy Act/Anti-Money Laundering (BSA/AML) deficiencies at the foreign bank’s Chicago branch (the Branch) and an OCC regulated subsidiary of the Holding Company. The OCC took parallel action on the same date against the Holding Company’s Chicago bank subsidiary. The Federal Reserve Board agreement requires that the Holding Company conduct a comprehensive review of its BSA/AML compliance program within 60 days, and within 90 days submit a report of its findings and recommendations, a written enhanced program, and a written plan to strengthen board oversight. Also within 90 days, the Branch must submit a written plan to improve its BSA/AML compliance, and the foreign bank, the Holding Company, and the Branch must submit an enhanced customer due diligence program. The OCC agreement requires that the Chicago bank’s board establish a compliance committee and within 90 days submit a compliance action plan. Within 30 days, the bank’s board must review its current engagement with an independent consultant, and within 90 days (i) develop a staffing plan for its internal BSA compliance department, (ii) conduct an MIS assessment, (iii) develop customer due diligence controls, and (iv) develop written suspicious activity policies and procedures. Both agreements require quarterly reporting, and neither includes a monetary penalty.
On April 25, the Federal Reserve Board issued a policy statement on deposit advance products. The statement came on the same day that the OCC and the FDIC proposed more formal guidance for such products. The Board statement identifies potential “significant risks” associated with deposit advance products, including UDAP risk and other consumer compliance risk. The statement directs examiners to thoroughly review any deposit advance products offered by supervised institutions for compliance with Section 5 of the FTC Act and reminds banks of their responsibility for vendors hired to offer deposit advance products.
On April 15, the Federal Reserve Board proposed a rule that would establish an annual assessment for bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and for nonbanks designated by the Financial Stability Oversight Council. The Dodd-Frank Act directed the Board to establish such an assessment to cover expenses the Board estimates are necessary to carry out its supervision and regulation of those companies. This proposed rule outlines how the Board would (i) determine which companies are assessed, (ii) estimate the total anticipated expenses, (iii) determine the assessment for each of the covered companies, and (iv) bill for and collect the assessment from the companies. Beginning this year, the Board proposes to notify covered companies of the amount of their assessment no later than July 15 of the year following each assessment period (the calendar year). After an opportunity for appeal, assessed companies would be required to pay their assessments by September 30 of the year following the assessment period. For the 2012 assessment period, the Board estimates that the assessment basis would be approximately $440 million. Comments on the proposal are due by June 15, 2013.
On April 15, the Federal Reserve Board and the FDIC issued additional guidance for the first group of institutions required to submit resolution plans pursuant to the Dodd-Frank Act. That group includes 11 institutions that submitted initial resolution plans last year. Based on their review of those initial plans, the regulators offer additional instruction as to what information should be included in the 2013 submissions, including more detailed information about certain potential obstacles to resolvability under the Bankruptcy Code. Given the additional request, the regulators also extended the due date for the plans from July 1, 2013 to October 1, 2013.
On April 9, the Federal Reserve Board and the OCC announced that payments to borrowers impacted by allegedly improper foreclosure practices would begin on April 12, 2013. The planned payments range from $300 to $125,000, and will be sent to certain borrowers whose mortgages were serviced by 11 of the 13 mortgage servicers subject to recently amended consent orders that replaced requirements related to the Independent Foreclosure Review process with $3.6 billion in cash payments and $5.7 billion in other assistance to 4.2 million borrowers. Payments to borrowers with mortgages serviced by two other servicers will be announced later. The payments will be sent in several waves, with the last wave expected to be sent in mid-July 2013. The announcement notes that the regulators categorized borrowers according to the stage of their foreclosure process and the type of possible servicer error. Then, amounts were determined for each category using the financial remediation matrix published in June 2012 as guidance, but also incorporating input from various consumer groups. The Board and the OCC also published a chart of payment amounts and the number of borrowers identified for each category.
On April 9, the Federal Reserve Board published a final rule that allows supervised entities to engage in off-exchange foreign currency transactions with retail customers. Covered transactions include foreign exchange transactions that are futures or options on futures, options on foreign currency not traded on a registered national securities exchange, and “rolling spot” transactions. The rule, which is substantially similar to the proposed version, establishes requirements for (i) risk disclosure statements to customers, (ii) recordkeeping, (iii) business conduct, (iv) customer confirmations, monthly statements, and notices of transfer, and (v) implementing internal rules and procedures to maintain trading and operational standards. The rule requires regulated institutions engaging in such transactions to (i) provide notice to the Federal Reserve Board, (ii) maintain capital requirements, and (iii) collect a certain margin amount for retail foreign exchange transactions. The rule takes effect on May 13, 2013.
Federal Reserve Board, New York DFS Issue Joint Enforcement Action against U.S. Branch of Foreign Bank
On April 4, the Federal Reserve Board released a March 25, 2013 written agreement between the Federal Reserve Board, the New York Department of Financial Services, and a German bank and its U.S. branch regarding certain BSA/AML deficiencies at the U.S. branch. The agreement requires that the bank and the branch retain within 30 days an independent consultant to conduct a comprehensive review of the branch’s compliance with BSA/AML rules and state regulations, and subsequently prepare a report of the findings. The agreement further requires that within 60 days of the compliance report prepared by the consultant, the bank and the branch (i) submit a written enhanced BSA/AML compliance program for the branch, (ii) submit a written plan to improve and enhance management oversight of the branch’s compliance program, (iii) submit a written program to improve customer due diligence and a written program to ensure timely and accurate SAR reporting, and (iv) engage a different independent testing consultant to develop a risk-based BSA/AML audit program and conduct an independent compliance test. In addition, the agreement requires the bank and the branch to submit within 60 days of the agreement a written plan to enhance compliance with OFAC requirements.
On March 29, the Federal Reserve Board published its quarterly Consumer Compliance Outlook, which includes the Board’s response to questions raised during a September 2012 interagency webinar on servicemember protection issues and SCRA compliance. Because that event had limited time for questions, the Board responded in writing to the most common questions received. The publication includes answers to questions related to (i) notification of active duty, (ii) maximum rate of interest on debts incurred prior to military service, (iii) foreclosure protection, (iv) the Homeownership Counseling Act, (v) permanent change of station orders, (vi) the Defense Manpower Data Center, and (vii) other miscellaneous issues.
On April 3, the Federal Reserve Board approved a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council when considering whether to designate a nonbank financial company as systemically important and subject to supervision by the Federal Reserve Board. Pursuant to the rule, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company’s consolidated revenues or assets are derived from or related to activities that are defined as financial in nature under the Bank Holding Company Act. In addition, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities. The final rule largely mirrors the rule as proposed, but includes some changes. For example, final rule states that engaging in physically settled derivatives transactions generally will not be considered a financial activity. The final rule also defines the terms “significant nonbank financial company” and “significant bank holding company.” The rule will become effective on May 6, 2013.
On April 3, the Federal Reserve Board and the OCC jointly published a white paper on the regulators’ study of bank performance in the context of 2006 interagency guidance regarding commercial real estate lending that established supervisory criteria for banks that exceeded 100 percent of capital in construction lending and 300 percent of capital in total commercial real estate (CRE) lending. According to the paper, banks with high concentrations of construction and total commercial real estate lending that exceeded supervisory criteria failed at higher rates than banks with lower concentrations. Specifically key findings include: (i) 13 percent of banks that exceeded only the 100 percent construction criterion failed, (ii) among banks that exceeded both the construction and total CRE lending supervisory criteria, 23 percent failed during the three-year economic downturn from 2008 through 2011, compared with 0.5 percent of banks for which neither of the criteria was exceeded, (iii) construction lending was a key driver in many failures, and (iv) banks that were public stock companies and exceeded the supervisory criteria on CRE concentrations tended to experience greater deterioration in condition than banks below the criteria, and banks with CRE concentrations higher than the guidance criteria experienced larger declines in their market capital ratio during the recent economic downturn.
On March 29, the Federal Reserve Board, the FDIC, the OCC, the NCUA, and the Farm Credit Administration issued an interagency statement to clarify the effective dates for changes to the Flood Disaster Protection Act enacted last year in the Biggert-Water Flood Insurance Reform Act (the Act). The statement informs financial institutions that the force-placed aspects of the Act became effective upon enactment, which was July, 6, 2012, while provisions related to private flood insurance and escrow of flood insurance payments do not take effect until the agencies issue regulations. The statement reiterates the OCC’s prior statement that the new flood insurance penalty provisions in the Act took effect immediately and apply to violations that occurred on or after July 6, 2012.
On March 28, the CFPB published a final rule to remove from Regulation Z a limitation on fees charged prior to credit card account opening. Effective immediately, the rule amends a restriction adopted by the Federal Reserve Board in April 2011, which expanded the 2009 Credit CARD Act fee limitation on certain fees charged during the first year after the account is opened to include fees charged prior to account opening. The CFPB rule eliminates the limitations on fees charged prior to account opening, and covers only those fees charged during the first year after account opening. The rule responds to a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the Federal Reserve Board’s broader application of the fee limit.
On March 25, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to Federal Reserve Chairman Ben Bernanke and Comptroller of the Currency Thomas Curry challenging the regulators’ response to the lawmakers request for documents and information regarding the regulators’ decision to amend a group of April 2011 consent orders with mortgage servicers and cease the Independent Foreclosure Review originally required by those orders. The lawmakers detail the responses and state that the majority of their 14 requests went unanswered. The letter notes recent reports that the foreclosure reviews revealed wrongful foreclosures of military members and borrowers who ever missed a payment, and suggests the regulators are shielding the servicers’ “criminal activity.”
On March 27, the Federal Reserve Board presented the findings of a November 2012 online survey of consumers’ use of mobile technology to access financial services and make financial decisions. The report follows a related March 2012 Federal Reserve Board report, and includes the Board’s general findings that (i) mobile phones and mobile Internet access are in widespread use, (ii) the ubiquity of mobile phones is changing the way consumers access financial services, (iii) mobile phones are also changing the way consumers make payments, (iv) security and usefulness concerns continue to be the main impediments to the adoption of mobile financial services, (v) smartphones are changing the way people shop, and (vi) mobile phones are prevalent among unbanked and underbanked consumers. The report points out that the use of mobile phones to make payments at the point of sale has increased more rapidly than the use of mobile phones for banking, and that there is “substantial growth potential” for mobile payments as the ability to make them becomes more widespread.