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Federal Reserve blocks national bank’s growth, cites internal governance and risk management oversight failures
On February 2, the Federal Reserve Board (Fed) cited compliance breakdowns and widespread consumer abuses as the primary factors behind its decision to issue an order to cease and desist against a national bank. In addition to blocking the bank from growing beyond $1.95 trillion in assets until the Fed approves internal governance and risk management reforms, the order also requires the bank to take actions in the areas of board effectiveness, risk management program improvement, third party reviews of plans and improvements, and reports on progress. The bank must, among other things, (i) create “separate and independent reporting lines” to the chief risk officer and the board, and (ii) enhance risk management oversight and functions, which includes creating “an effective risk identification and escalation framework.” The bank concurrently agreed to replace four current board members in 2018, with three replaced by April. Notably, the order does not require the bank to cease current activities such as accepting customer deposits or making consumer loans.
The Fed also sent letters to the bank’s former lead independent director and former chair of the board of directors (see letters here and here) to address the “many pervasive and serious compliance and conduct failures” that occurred during their tenures. Citing ineffective oversight following awareness of alleged consumer abuses, the Fed stated that the former directors failed to initiate any serious inquiry or request that the board do so. Further, the Fed asserted that the former chair of the board continued to support the sales goals that were a major cause of the identified sales practice problems and failed to initiate a serious investigation or inquiry. A third letter sent to the current board of directors outlines steps the board must take to improve senior management reporting, maintain an effective risk management structure, and ensure compensation and other incentive programs are “consistent with sound risk management objectives and promote . . . compliance with laws and regulations.” (See here and here for previous InfoBytes coverage on the alleged improper sales practices.)
In response, the bank issued a press release stating it will commit to the Fed’s requirements and will provide a compliance plan for oversight, compliance, and operational risk management to the Fed within 60 days. The plan will also outline measures already completed by the bank, and if approved by the Fed, the bank will engage independent third parties to review its adoption and implementation of the plan.
Federal Reserve, FDIC, OCC release stress testing scenarios
On February 1, the Federal Reserve Board (Fed) published stress testing scenarios to be used when conducting the 2018 Comprehensive Capital Analysis and Review (CCAR) evaluations and stress test exercises for large bank holding companies and large U.S. operations of foreign firms. Instructions for participating banks also were released. According to the Fed, in an effort designed to “support the transition to stress testing,” foreign banks will only be required to participate in a “simplified global market shock” portion of the CCAR evaluation. As previously covered in InfoBytes, last December the Fed issued a request for comments on three proposals designed to increase stress testing transparency and resiliency of large, complex banks. This included a proposal to publicly release, for the first time, information concerning the models and methodologies used during supervisory stress tests, including those applied in the CCAR. According to the Fed’s press release, the qualitative and quantitative evaluations will be used to evaluate a bank’s ability to survive in times of economic stress and are broken into three scenarios with varying degrees of stress: baseline, adverse and severely adverse. The Fed reminded participating banks that capital plan and stress testing submissions are due by April 5.
The same day, the OCC issued its own stress testing scenarios for required OCC-supervised institutions with more than $10 billion in assets, and on February 2, the OCC released a notice and request for comments (notice) on revised templates to be used for stress test exercises performed by covered institutions with total consolidated assets of $50 billion or more. According to the notice, revisions would reduce the number of data items in the Supplemental Schedule by approximately half, and include (i) the elimination of two reporting schedules—the Regulatory Capital Transitions Schedule and the Retail Repurchase Exposures Schedule; (ii) the addition of new criteria for institutions subject to the global market shock evaluation; and (iii) clarification on how “Credit Loss Portion” and “Non-Credit Loss Portion” are reported in the summary schedule worksheets. Furthermore, under the revisions, savings associations would be eligible to use the simplified reporting requirements already available to other large, non-complex holding companies. The notice was published in the Federal Register on February 2 and comments are due by March 5.
Additionally, on February 6, the FDIC released economic scenarios developed in coordination with the Fed and the OCC for certain supervised financial institutions. According to the FDIC, the scenarios “include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets.”
FHFA extends deadline to March 30 for credit score input
On February 2, the Federal Housing Finance Agency (FHFA) announced that it is extending the deadline for input on how Fannie Mae and Freddie Mac (the GSEs) should update their current credit score requirements. Interested parties now have until March 30 to respond to the 22 questions outlined in the Request for Input (RFI) issued by FHFA on December 20, 2017. As previously covered by InfoBytes, the RFI sought input on four options for replacement of the Classic FICO credit score model currently used by the GSEs. The four options include (i) requiring the use of either the FICO 9 credit score model or the VantageScore 3.0 credit score model; (ii) requiring the use of both the FICO 9 and the VantageScore 3.0 credit score models; (iii) allowing lenders to choose between either the FICO 9 or the VantageScore 3.0 credit score models; or (iv) allowing lenders to deliver multiple scores through a waterfall approach that would establish a primary and a secondary score.
Appraisal Qualifications Board to change qualification criteria for real estate appraisers
On February 1, the Appraisal Qualifications Board (Board) announced new real property appraiser qualification criteria. The Board is a part of the Appraisal Foundation, which is authorized by Congress to set the standards and qualifications for real estate appraisers. Effective May 1, states may choose to adopt the new criteria, which aims to increase the number of available appraisers, especially in rural areas. Specifically, the new criteria (i) reduces the college-level education degree requirements for licensed residential appraisers and certified residential appraisers; (ii) creates an options for licensed residential appraisers to become certified without a college-level education requirement; and (iii) reduces the number of field hours needed to obtain either designation.
Review procedures need enhancing according to GAO’s Regulatory Flexibility Act compliance report
On January 30, the Government Accountability Office (GAO) released its annual report on federal financial regulators’ compliance with the Regulatory Flexibility Act (RFA). Specifically, the report assessed whether certain regulators adhered to the RFA when drafting and implementing regulations that may affect small entities. Such regulators include the Federal Reserve, Commodity Futures Trading Commission, CFPB, FDIC, OCC, and SEC (collectively, the "agencies"). Under the RFA, the agencies must either (i) certify that a rule would not have a significant economic impact on a substantial number of small entities, or (ii) perform a regulatory flexibility analysis to assess the rule’s impact on small entities and “consider alternatives that may minimize any significant economic impact of the rule.” The report disclosed issues related to certifications. Examples included (i) providing incomplete disclosures of data sources or methodologies of economic analysis and impact; (ii) failing to provide definitions for criteria used to determine a “substantial number” or a “significant economic impact”; and (iii) relying on alternative and potentially outdated definitions of small entities. Additionally, GAO noted that many regulators were unable to provide supporting documentation for their analyses. GAO presented 10 recommendations for enhancing compliance procedures, and stressed that regulators should “develop and implement specific policies and procedures for consistently complying with RFA requirements and related guidance for conducting RFA analyses.” Specific recommendations for each agency are located here.
Special Inspector General for TARP highlights MHA threat
On January 30, the Office of the Special Inspector General (SIG) for the Troubled Asset Relief Program (TARP) delivered a report to Congress, which identified unlawful conduct by certain of the 130 financial institutions in TARP’s Making Home Affordable Program (MHA) as the top threat to TARP and, thus, the SIG’s top investigative priority. The SIG explained that “significant oversight [of MHA] is required because of the risk of waste, fraud, and abuse” that occurs by participants. Indeed, the report highlights specific instances of mismanagement of MHA by a select number of large financial institutions. Close to one million homeowners still participate in MHA initiatives. Accordingly, the risk of unlawful conduct by financial institutions in this area can destabilize the market and jeopardize other participants in MHA such as Fannie Mae, Freddie Mac, FHFA, and the VA.
FHFA releases 2018-2022 strategic plan
On January 29, the Federal Housing Finance Agency (FHFA) released its strategic plan for 2018-2022, which sets three strategic goals and discusses multiple factors associated with achieving each goal. FHFA’s three strategic goals for 2018-2022 are:
- Ensure safe and sound regulated entities. FHFA intends to, among other things, use a risk based system to identify supervisory concerns and monitor entities for timely remediation. Additionally, FHFA intends to monitor industry trends and market conditions for emerging risks and issue supervisory guidance and policies related to expectations for safety and soundness.
- Ensure liquidity, stability, and access in housing finance. FHFA intends to, among other things, promote ongoing liquidity in the marketplace for new and refinanced mortgages. FHA will monitor access to mortgage credit and collaborate with other regulators to identify emerging issues. FHA will support multifamily housing needs of the underserved market and promote policies that support fair access to financial services for qualified borrowers.
- Manage Fannie Mae and Freddie Mac’s ongoing conservatorships. FHFA will continue, among other things, to oversee Fannie Mae and Freddie Mac staffing, will address outstanding claims involving Fannie Mae and Freddie Mac, and will oversee the implementation of the Uniform Mortgage Data Program.
The strategic plan also identifies critical factors that may affect achievement of the above goals, including (i) economic conditions and government policies of foreign markets; (ii) market developments and legislative reform affecting the U.S. housing market; (iii) financial performance of Fannie Mae and Freddie Mac; (iv) the status of the Fannie Mae and Freddie Mac conservatorship; and (v) management of FHFA resources.
CFPB Succession: Mulvaney removes Fair Lending office enforcement power; Warren sends payday congressional inquiry
On February 1, it was reported that Mulvaney has moved The Office of Fair Lending and Equal Opportunity from the Supervision, Enforcement and Fair Lending division (SEFL) of the CFPB to the Office of the Director. According to sources, Mulvaney sent an email which states that the Fair Lending office will now be focused on “advocacy, coordination and education” as opposed to the day-to-day responsibility of enforcement and supervision oversight, which will remain in the SEFL division. A spokesperson for the acting director stated, “by elevating the Office of Fair Lending to the Director’s Office, we have enhanced its ability to focus on its other important responsibilities...by combining these efforts under one roof, we gain efficiency and consistency without sacrificing effectiveness.”
On January 31, Senator Elizabeth Warren and five other Democratic members of congress sent a letter to the CFPB inquiring about the Bureau’s decision to reconsider its final rule addressing payday loans, vehicle title loans, and certain other extensions of credit, as previously covered by InfoBytes. The letter expresses dissatisfaction with the lack of explanation for this decision and for the CFPB’s decision to end a multiyear investigation into a national installment loan lender (previously covered by InfoBytes here). The letter requests specific information related to the payday rule decision, such as, (i) lists of personnel involved in providing legal advice and lists of meetings attended by political appointees related to the payday decision; (ii) an explanation of the analysis that lead to the decision; and (iii) information related to communications with certain members of the payday loan industry. Interestingly, the letter is addressed to Leandra English as “Acting Director” of the CFPB and Mick Mulvaney as “Director” of the Office of Management and Budget.
As for Leandra English’s litigation, on January 31, English filed her corrected Appellant’s Brief with the U.S. Court of Appeals for the D.C. Circuit. The brief does not raise any significantly new arguments. The government’s response is due by February 23. Additionally, on February 1, a judge for the U.S. District Court for the Southern District of New York dismissed a similar complaint brought by a NY credit union (previously covered by InfoBytes here). In granting the government’s motion to dismiss, the judge agreed that the credit union did not allege a “concrete and particularized injury caused by CFPB actions under Mulvaney’s leadership” and therefore, did not have standing to bring the action.
Bank regulators share living will expectations with foreign banks operating in the U.S.
On January 29, the Federal Reserve Board and the FDIC sent letters to 19 foreign banks operating in the United States to outline and clarify resolution plan expectations. According to a joint release issued by the regulators, Dodd-Frank-mandated resolution plans—commonly known as living wills—require certain foreign banks to detail strategic plans for their U.S. operations “for rapid and orderly resolution under bankruptcy” should the banks fail or fall under material financial distress. Requested in the letters, among other things, are specifics on resolution strategies, capital calculations, management of liquidity, stress testing, and organizational structures. Banks are required to submit 2018 resolution plans no later than December 31, 2018. Refer here to access a list of banks and letters.
CFPB releases RFI on administrative adjudications
On January 31, the CFPB released its Request for Information (RFI) on administrative adjudications, which solicits public comment on the process for the Bureau to “better understand the benefits and impacts of its use of administrative adjudications, and how its existing process may be improved.” The RFI broadly requests feedback on “all aspects” of the administrative adjudication process but also highlights specific topics on which comment is requested, including (i) whether the Bureau should abandon the process and pursue contested matters only in federal court; (ii) the policy for proceedings to be conducted expeditiously, including the associated timeframes; (iii) whether the Bureau should make documents available to respondents electronically at its own expense; (iv) whether CFPB staff should be permitted to issue subpoenas without approval of the administrative law judge; (v) limitations on expert witnesses; (vi) limitations on discovery, including deposing fact witnesses or servicing interrogatories; and (vii) whether there should be the opportunity to stay a decision of the director pending appeal by filing a supersedeas bond. The RFI was published in the Federal Register on February 5 and comments are due by April 6.
This is the second RFI released related to the CFPB’s plan to publish a series of RFIs seeking input on the way the Bureau is performing its statutory obligations. As previously covered by InfoBytes, the CFPB’s first RFI related to Civil Investigative Demands (CIDs).