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  • OCC report outlines key risks in the federal banking system

    On June 18, the OCC published its Semiannual Risk Perspective for Spring 2024, a report assessing the health and risks of the federal banking system focusing on threats to the safety and soundness of banks and their compliance with applicable laws and regulations. In its release about the report, the OCC stated that the banking system remains sound, but recognized potential consumer difficulties due to a slowing labor market, high interest rates, and “sticky” inflation. The report encouraged financial institutions to improve continuously risk management processes, stating that it was “crucial that banks establish an appropriate risk culture that identifies potential risk, particularly before times of stress.” The information in the report was based on data up to December 31, 2023, and included a special topic, operating environment, bank performance, and trends in key risks.

    According to the report, key risk themes included:

    1. Credit Risk: There was an increase in credit risk, particularly in the commercial real estate sector. The office sector and some multifamily properties were under stress from higher interest rates and structural changes. Loans in these sectors, especially interest-only loans due for refinancing in the next three years, pose a heightened risk.
    2. Market Risk: Banks were experiencing pressure on net interest margins due to deposit competition, which “may be nearing a peak.” There were challenges in risk management from potential future interest rate changes and unpredictable depositor behavior. The use of wholesale funding was growing, though more slowly, and banks face elevated unrealized losses in their investment portfolios, despite improvements.
    3. Operational Risk: The operational risk was high due to the evolving nature of the banking environment and cyber threats, including ransomware, were a continued threat. Digitalization and the adoption of new products and services, along with third-party engagement, increased complexities and risks. Fraud incidents and the importance of fraud risk management were also emphasized.
    4. Compliance Risk: Banks must navigate a dynamic environment with evolving customer preferences, and compliance risk management frameworks need to be adequate and adaptable to changes in banks' risk profiles. Fraud remained a significant risk, with check and wire fraud, and peer-to-peer transaction scams becoming more common. The OCC will continue to evaluate banks' CRA performance.

    The report emphasized that these risks can be interrelated, noting that a “stress event could manifest through operational and/or financial events and have institution-specific or sector-wide impacts,” and that “[e]ach stress event may vary (e.g., operational, liquidity, credit, compliance, and other) and resiliency implications need to be proactively considered.”

    Bank Regulatory Federal Issues OCC Risk Management

  • OCC’s Liang discusses bank vulnerabilities and floats policies

    On June 24, the U.S. Under Secretary for Domestic Finance, Nellie Liang, delivered a speech at the 2024 OCC Bank Research Symposium addressing depositor behavior, bank liquidity, and run risk. Liang discussed the spring 2023 bank runs that led to exposures in financial vulnerabilities, and highlighted how technologies and social media “amplified” these vulnerabilities as depositors withdrew their monies rapidly. When discussing the evolution of the banking model, Liang shared that, despite the spring 2023 events, deposits have steadily grown relative to GDP over the past 40 years, displaying banks’ continued benefit to provide liquidity services. Nonetheless, loans and credit lines to non-bank financial intermediaries (NBFIs) have increased.

    Among other things, Liang stressed the need for supervisors and regulators to effectively monitor core vulnerabilities, like those that were the “key drivers” of recent runs and called for banks to have the operational capacity to borrow from the discount window. She further highlighted the need to increase transparency of Federal Home Loan Bank (FHLB) practices, noted how the proposal for pre-positioned collateral requirements at the discount window was promising, but raised ultimately questions regarding the type and amount of collateral required, and raised the need to re-examine deposit insurance coverage.

    Bank Regulatory OCC NBFI

  • New York Fed releases paper on nonbanks reliance on banks

    On June 20, the New York Fed released an article highlighting a recent study that revealed nonbank financial institutions (NBFIs) growth was reliant on banks for funding and liquidity insurance. The article observed that while this relationship between banks and NBFIs may result in overall growth and a wider access to financial services, it could add risks seen during financial strains like the 2007-2008 financial crisis and the Covid-19 pandemic. In response to these stressful periods, NBFIs have turned to banks, and later government agencies, for liquidity. And because the asset holdings of banks and NBFIs have become similar, any forced asset sales by NBFIs could trigger a chain reaction leading to market disruptions. According to the authors of the study, a holistic approach to the bank-NBFI relationship will be necessary to manage systemic risk and maintain financial stability.

    Bank Regulatory Federal Issues New York Federal Reserve Nonbank Liquidity

  • FHFA requests information on its FHLBank Affordable Housing Program

    Agency Rule-Making & Guidance

    On June 20, FHFA released its request for input (RFI) on the application process for the Federal Home Loan Banks’ (FHLBanks) Affordable Housing Program (AHP). FHFA invited input on all aspects of the AHP application process, with a deadline for submissions no later than August 19. The AHP housing program was designed to provide funding to purchase, construct, and rehabilitate housing for very low-, low-, and moderate-income households. Each FHLBank provides funding through either a competitive application program that funds both rental and homeownership projects or a homeownership set-aside program that supports owner-occupied housing for income-eligible households. The RFI focused on the competitive application programs and posed eight questions related to the AHP application process, including the use of consultants to apply for AHP funds, and opportunities for improvements to the application process.

     

    Agency Rule-Making & Guidance FHFA RFI FHLB Affordable Housing

  • Agencies finalize new standards for AVMs

    Agency Rule-Making & Guidance

    On June 20, the CFPB, OCC, Fed, FDIC, NCUA and FHFA (the financial services regulators) issued a final rule implementing new provisions governing the use of automated valuation models (AVMs), which are commonly used by mortgage originators and secondary-market issuers to estimate a property’s value for loan underwriting and portfolio monitoring. The rule, which was proposed in June 2023 (covered by InfoBytes here), had mortgage servicers adopt policies and procedures ensuring that AVMs operate with certain quality control standards, designed to operate with a high level of confidence. These estimates should be produced to protect against data manipulation and avoid conflicts of interest. The rule included requirements to conduct random sampling testing and reviews, and to comply with nondiscrimination laws. The financial services regulators noted that despite comments that lending institutions have little control over how AVMs were created, the rule “will allow the implementation of the standards to evolve along with changes in AVM technology and minimize compliance costs.” 

    In announcing the final rule, FDIC Chairman Martin Gruenberg emphasized that the rule created an independent requirement “to ensure that AVMs used in connection with making credit decisions or covered securitization determinations adhere to quality control standards designed to comply with applicable nondiscrimination laws,” and that the “new requirement would further mitigate potential discrimination risk in lenders’ use of AVMs.” In its announcement, the OCC stated that the rule “supports Acting Comptroller of the Currency Michael J. Hsu’s priority to reduce inequality and elevate fairness in banking.”

    The final rule will go into effect the first day of the calendar quarter 12 months after its publication in the Federal Register.

    Agency Rule-Making & Guidance CFPB OCC Model Valuation Mortgages

  • CFPB extends its small business lending rule and opens comment period

    Agency Rule-Making & Guidance

    On June 25, the CFPB released its formal action to extend the compliance dates for its small business lending rule, section 1071 (covered by InfoBytes here). The extension of 290 days represented the time elapsed between the Texas court’s first issuance of a stay last year and the Supreme Court’s decision in CFPB v. CFSA last month. As previously covered by InfoBytes, the CFPB notified the public of these changes in May but has now issued its interim final rule with a request for public comment. The new rule will implement section 1071 by adding subpart B to Regulation B of the rule, and the CFPB estimated this rule will affect at most 1,900 banks, savings associations and credit unions with $10 billion or less in total assets.

    Under the new rule, the following dates will go into effect:

    • Tier 1 institutions (highest volume lenders): The new compliance date will be July 18, 2025, and the first filing deadline will be June 1, 2026.
    • Tier 2 institutions (moderate volume lenders): The new compliance date will be January 16, 2026, and the first filing deadline will be June 1, 2027.
    • Tier 3 institutions (lowest volume lenders): The new compliance date will be October 18, 2026, and the first filing deadline will be June 1, 2027.

    The CFPB also included the previous rule’s 12-month grace period wherein the Bureau would not assess penalties for errors made in good faith in data reporting. To add clarity to these changes, the Bureau issued an unofficial redline of its final changes. The new rule will go into effect 30 days following its publication in the Federal Register.

     

    Agency Rule-Making & Guidance Federal Issues Regulation B CFPB Small Business Lending Bank Compliance

  • FDIC approves final rule to adjust resolution plan requirements

    Agency Rule-Making & Guidance

    On June 20, the FDIC adopted its final rule amending the resolution planning requirements for large banks. The amended rule will amend 12 C.F.R. Part 360 “Resolutions and Receivership Rules,” and, among other components, require a covered institution’s full resolution submission to include:

    1. Identified Strategy – resolving issues in the event of a failure.
    2. Failure Scenario – proof of assets in the event of a failure.
    3. Executive Summary – summarizing the identified strategy with descriptions and discussions.
    4. Organizational Structure – legal entities, core business lines, and branches.
    5. Methodology for Material Designation
    6. Separation from Parent – demonstrate the ability to operate separately from parent org.
    7. Overall Deposit Activities – including foreign deposits, sweep arrangements, etc.
    8. Critical Services – ensure continuity of the institution’s critical services in resolution.
    9. Key Personnel – identified by title, function, location, core business line, etc.
    10. Franchise Components – ensure that franchises are marketable in resolution.

    Under the rule, depository institutions with more than $100 billion in total assets must submit a full resolution plan either biennially or triennially (most will file triennially, with the “largest and most systematic and interconnected” institutions required to file biennially). Depository institutions with at least $50 billion but less than $100 billion in total assets must submit more limited informational filings – which would not include an identified strategy for the institution’s resolution or proof of assets in the event of a failure – on a triennial basis. The FDIC noted that because such institutions will file less information, “the FDIC expects the engagement and capabilities testing [] will be a key component of its resolution planning for such firms and expects to conduct engagement and capabilities testing with most [of these institutions] in each cycle.” Failure to submit a full resolution submission, and address adequately a material weakness identified by the FDIC may lead to enforcement actions against non-compliant institutions. The rule will go into effect on October 1 and the FDIC will notify institutions of the date when their first full resolution submissions or interim supplements are due under the final rule (The FDIC will set a date for Group A Filers at least 270 days after the effective date, and the FDIC will set a date for Group B Filers at least a year after the effective date).

    In an OCC news release, the Acting Comptroller of the Currency stated his support for the FDIC’s resolution plan rule, noting that when such plans are lacking, “consequences can include not just disorderly failure and the need for extraordinary government action, but also a broader loss of trust in banks and their regulators.” The Director of the CFPB, Rohit Chopra, also released a statement and noted that the sale of a failed bank to an even larger institution can result in substantial costs to the Deposit Insurance Fund. Chopra expressed support that rules requiring banks to demonstrate how they might be wound down would help the FDIC pursue alternative dissolution strategies for large banks, such as breaking up the bank into smaller components or reprivatizing it through an initial public offering.

    Agency Rule-Making & Guidance FDIC Bank Resolution Enforcement

  • OCC proposes revisions to its recovery planning guidelines

    Agency Rule-Making & Guidance

    On June 24, the OCC proposed revisions to its recovery planning guidelines—plans for how to respond quickly and effectively to, and recover from, the financial effects of severe stress on large financial institutions. Considering the increase in withdrawals of uninsured deposits in March 2023, the OCC will expand the application of its guideline requirements to insured national banks, federal savings associations and federal branches with average total consolidated assets of $100 billion or more.

    The proposed revisions also change “average total consolidated assets” as defined in the guidelines to clarify that the calculation would be based on the “total assets” line of the Call Report, not the “average total consolidated assets” line of the Call Report. The OCC said this may affect the quarter in which a bank becomes a covered bank.

    The OCC further proposed to incorporate a yearly, risk-based testing standard of recovery plans to include stress scenarios that ensure “the plan’s triggers appropriately reflect the covered bank’s particular vulnerabilities and will, in practice, provide the covered bank with timely notice of a continuum of increasingly severe stress, ranging from warnings of the likely occurrence of severe stress to the actual existence of severe stress.” Testing should ensure that management and the board can confirm the bank's readiness to execute identified strategies under stress. The OCC will require that a covered bank’s recovery plan will consider appropriately both financial risk and non-financial risk (including operational and strategic risks), as well as be integrated into its risk governance functions.

    Covered banks will have one year from the effective date of the amendments to comply with the new requirements. Comments must be received 30 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Bank Regulatory Federal Issues OCC

  • CFPB settles HMDA lawsuit with large mortgage lender for $3.95 million

    Federal Issues

    On June 18, the CFPB filed a proposed stipulated final judgment and order in its lawsuit against a large mortgage lender for violating HMDA, Regulation C and the CFPA. The mortgage lender agreed to pay a civil money penalty of $3.95 million. As previously covered by InfoBytes, the CFPB filed its complaint against the Florida-based nonbank mortgage lender in October 2023 to obtain relief and penalties associated with the lender’s alleged repeated failure to comply with HMDA reporting requirements and the terms of a 2019 Consent Order. In addition to the monetary penalty, the proposed order will prohibit the mortgage lender from violating HMDA, and require the development of additional policies, and issued controls to prevent errors in recording consumer and loan data and HMDA data reporting. Under the proposal, the mortgage lender must also establish an HMDA Compliance Subcommittee that will include the CEO, COO, CRO, and CLO, and retain a third-party independent auditor to perform HMDA data transaction testing, perform a root cause analysis, and issue written reports for five years. Within 30 days of the date the order will be entered by the court, the mortgage lender must create a compliance plan outlining detailed steps, designed policies, board notifications, and specific timelines. In agreeing to the proposed stipulation, the mortgage lender neither admitted nor denied the allegations in the complaint.

    Federal Issues CFPB Mortgages Enforcement HMDA

  • FHFA approves Freddie Mac's second mortgage pilot

    Federal Issues

    On June 20, FHFA conditionally approved a limited pilot program for Freddie Mac to begin purchasing certain single-family closed-end second mortgages. This decision came after implementing a new approval process for products from Freddie Mac and Fannie Mae, which became effective in April 2023. The pilot will determine if the new mortgage product “advances Freddie Mac's statutory purposes and benefits borrowers, particularly in rural and underserved communities.”

    FHFA's approval will set specific limitations for the pilot, including (i) a $2.5 billion cap on purchases; (ii) a maximum duration of 18 months; (iii) a maximum loan amount of $78,277, (in alignment with the CFPB’s Qualified Mortgage criteria); (iv) a 24-month “seasoning period” for the first mortgage; and (v) a restriction to primary residences only. Following the pilot, the FHFA will evaluate its success and effectiveness. Any proposed expansion or conversion of the pilot into a regular program will require a new round of public comments and FHFA approval, based on the pilot's initial outcomes.

    Federal Issues FHFA Freddie Mac Mortgages

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