On November 21, the OCC and the FDIC separately issued guidance that establishes numerous expectations for institutions offering deposit advance products, including with regard to consumer eligibility, capital adequacy, fees, compliance, management oversight, and third-party relationships. For example, under the guidance the agencies expect banks to offer a deposit advance product only to customers who (i) have at least a six month relationship with the bank; (ii) do not have any delinquent or adversely classified credits; and (iii) meet specific financial capacity standards. The guidance also establishes, among other things, that (i) each deposit advance loan be repaid in full before the extension of a subsequent loan; (ii) banks refrain from offering more than one loan per monthly statement cycle and provide a “cooling-off period” of at least one monthly statement cycle after the repayment of a loan before another advance is extended; and (iii) banks reevaluate customer eligibility every six months. The final guidance is substantially the same as the versions proposed in April. However, the agencies added language to clarify that eligibility and underwriting expectations do not require the use of credit reports, and to emphasize that the guidance applies to all deposit advance products regardless of how the extension of credit is offered. Acknowledging the demand for short-term, small-dollar credit products, and dismissing the concerns that the guidance might restrict such credit, the FDIC encouraged banks to continue to offer “properly structured products” and to develop new or innovative programs to effectively meet the need for small-dollar credit. As a reminder, the Federal Reserve Board did not propose similar guidance, but instead issued a policy statement.
On November 17, the Comptroller of the Currency, Thomas Curry, delivered remarks at the American Bar Association/American Bankers Association BSA/AML conference in which he identified common BSA/AML compliance risks and failures, and identified steps industry participants and regulators should take to improve compliance. The Comptroller explained that successful BSA/AML compliance is dependent not only on “the strength of the institution’s technology and monitoring processes, and the effectiveness of its risk management,” but also on strong corporate governance processes and management’s willingness to commit adequate resources. Comptroller Curry called on banks to commit sufficient resources and take a “holistic approach” toward BSA/AML compliance, for example, by dispersing accountability throughout the organization instead of concentrating compliance in a single unit. Noting that this is particularly important in the M&A context, the Comptroller stated that it is vital that due diligence go beyond a target’s credit portfolio to include a review of the target’s BSA/AML program. In addition to lack of compliance resources, the Comptroller identified as risk trends: (i) poor management of international activities—foreign correspondent banking, cross-border funds transfers, bulk cash repatriation, and embassy banking; (ii) third-party relationships and payment processors; and (iii) emerging payment technologies, including virtual currencies. He stressed the importance of information sharing among institutions and between institutions and their regulators, and called for (i) legislation that would encourage the filing of SARs by strengthening the statutory safe harbor from civil liability for filing financial institutions, (ii) broadening the Patriot Act safe harbor for institutions that share information with each other about potential crimes and suspicious transactions, and (iii) exploring ways government can provide more robust and granular information about money laundering schemes and typologies to institutions in a more timely way.
Governor Yellen Addresses Bank Director Removal Over Foreclosure Practices; Lawmakers Press Regulators On Independent Foreclosure Review Details
On November 18, Federal Reserve Chair nominee Janet Yellen responded to a recent inquiry by Senator Elizabeth Warren (D-MA) seeking more details about the Federal Reserve Board’s process for determining whether bank officers or directors should be removed because they directly or indirectly participated in the alleged violations that have resulted in various mortgage servicer settlements. Governor Yellen stated that the Federal Reserve Board “has not, to date, taken any actions removing or prohibiting insiders of the mortgage servicing organizations that were subject to the 2011 and 2012 mortgage servicing enforcement actions for their conduct in connection with servicing or foreclosure activities”, but “[the Federal Reserve Board is], however, continuing to investigate whether such removal or prohibition actions are appropriate.” In addition, on November 15, Senator Warren, joined by Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA), again pressed the Federal Reserve Board and the OCC to release a public report on the Independent Foreclosure Review process. This latest request follows other similar requests made earlier this year.
On November 20, the OCC announced in Bulletin 2013-34 that as part of its ongoing implementation of the Dodd-Frank Act’s mandate that the OCC integrate Office of Thrift Supervision (OTS) policies with existing OCC policies, the OCC is rescinding the OTS compliance documents listed in an appendix provided with the announcement. A second appendix lists OCC policy guidance that the OCC is applying to federal savings associations in cases where policy guidance did not already exist. The announcement does not cover OTS policies and guidance related to the FCRA, the CRA, UDAP, or mortgage regulations, which the OCC plans to address at a later date.
On November 15, the Federal Reserve Board, the FDIC, and the OCC finalized revisions to the “Interagency Questions and Answers Regarding Community Reinvestment” (Q&As). The agencies adopted the revisions largely as proposed, with some minor changes in response to comments. The new Q&As, which include revisions to five questions and answers and two new questions, generally are 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. The new Q&As take effect when they are published in the Federal Register.
On November 12, the OCC issued Bulletin 2013-33, which establishes the standards the OCC uses when it requires banks to employ independent consultants as part of an enforcement action. The Bulletin explains that when conducting its initial assessment of the need for an independent consultant, the OCC considers, among other factors: (i) the severity of the violations; (ii) the criticality of the function requiring remediation; (iii) confidence in bank management’s ability to identify violations and take corrective action in a timely manner; (iv) the expertise, staffing, and resources of the bank to perform the necessary actions; (v) actions already taken by the bank to address the violations or issues; and (vi) the services to be provided by an independent consultant. The bulletin outlines the OCC’s process for reviewing a consultant selected by a bank, including its expectations for a bank’s due diligence process when retaining an independent consultant. The bulletin also describes the OCC’s oversight of the performance of the consultant, the nature of which can be impacted by, among other things: (i) the nature of deficiencies or violations the independent consultant is engaged to identify, including with respect to recommendations regarding remediation; (ii) the scope and duration of work; and (iii) the potential for and materiality of harm to consumers and the bank.
On November 12, the FDIC released the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Act. Each scenario includes key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets. The baseline scenario represents expectations of private sector economic forecasters; the adverse and severely adverse are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions. The FDIC release follows the recent release of stress test scenarios by the Federal Reserve Board and the OCC. The Federal Reserve Board also recently issued a final policy statement that describes the process by which it will develop future stress test scenarios.
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.
On October 30, the OCC issued Bulletin 2013-29 to update guidance relating to third-party risk management. The Bulletin, which rescinds OCC Bulletin 2001-47 and OCC Advisory Letter 2000-9, requires banks and federal savings associations (collectively “banks”) to provide comprehensive oversight of third parties, including joint ventures, affiliates or subsidiaries, and payment processors. It is substantially more prescriptive than CFPB Bulletin 2012-3, and incorporates third-party relationship management principles underlying recent OCC enforcement actions.
The Bulletin warns that failure to have in place an effective risk management process commensurate with the risk and complexity of a bank’s third-party relationships “may be an unsafe and unsound banking practice.” It outlines a “life cycle” approach and provides detailed descriptions of steps that a bank should consider taking at five important stages: Read more…
Prudential Regulators Issue Joint Agreement On Classification And Appraisal Of Securities Held By Financial Institutions
On October 29, the FDIC, the Federal Reserve Board, and the OCC issued a joint agreement to update and revise the 2004 Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts. The updated agreement reiterates the importance of a robust investment analysis process and the agencies’ longstanding asset classification definitions. It also replaces references to credit ratings with alternative standards of creditworthiness consistent with sections 939 and 939A of the Dodd-Frank Act, which directed the agencies to remove any reference to or requirement of reliance on credit ratings in the regulations and replace them with appropriate standards of creditworthiness. The agencies adopted those new standards in 2012 (see, e.g., the OCC’s final rule). The joint agreement provides examples to demonstrate the appropriate application of the new standards to the classification of securities.
Last week, the Federal Reserve Board, the FDIC, the NCUA, and the OCC released interagency guidance related to the accounting treatment and regulatory credit risk grade or classification of commercial and residential real estate loans that have undergone troubled debt restructurings (TDRs). The guidance clarifies the definition of collateral-dependent loans and states that impaired collateral-dependent loans should be measured for impairment based on the fair value of the collateral rather than the present value of expected future cash flows.
On October 23, the CFPB, the OCC, the FDIC, the Federal Reserve Board, the NCUA, and the SEC proposed joint standards for assessing the diversity policies and practices of regulated institutions. Section 342 of the Dodd-Frank Act required the Office of Minority and Women Inclusion (OMWI) at each agency to develop the standards. The Act specifically prohibits the standards from imposing requirements on or otherwise affecting the lending policies and practices of any regulated entity, or requiring any specific action based on the findings of an assessment, and the agencies state that the assessments will not occur within the standard examination or supervision process. The standards, which the agencies believe are designed to promote “transparency and awareness,” cover four general areas: (i) organizational commitment to diversity and inclusion, (ii) workforce profile and employment practices, (iii) procurement and business practices to promote supplier diversity, and (iv) practices to promote transparency of organizational diversity and inclusion. The agencies state that the standards account for variables including asset size, number of employees, governance structure, income, number of members or customers, contract volume, location, and community characteristics, and the agencies recognize the standards may need to change and improve over time. The proposed standards are subject to a public comment period, which will run for 60 days once they are published in the Federal Register.
On October 24, the Federal Reserve Board issued a proposed rule it developed with the OCC and the FDIC to establish a minimum liquidity coverage ratio (LCR) consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework. The proposal would create for the first time a minimum liquidity requirement for certain large or systemically important financial institutions. The covered institutions would be required to hold (i) minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, and (ii) liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The requirements would apply to all internationally active banking organizations—i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions designated by the FSOC. The proposal also would apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets. The regulators propose various categories of high quality, liquid assets and also specify how a firm’s projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations. Comments on the proposed rule must be submitted by January 31, 2013.
On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.” Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The DOJ and HUD did not participate in the Interagency Statement.
The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014. The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “do not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” Furthermore, the Interagency Statement will not necessarily preclude civil actions. Read more…