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FDIC releases winter 2017 Supervisory Insights
On January 10, the FDIC released its Winter 2017 Supervisory Insights (see FIL-5-2018), which contains articles discussing credit management information systems and underwriting trends. The first article, “Credit Management Information Systems: A Forward-Looking Approach,” discusses, among other things, how financial institutions can incorporate forward-looking metrics to assist in identifying future issues. The article also emphasizes the importance of effective risk management programs which contain policies and procedures that support strategic decision making by senior management and board members responsible for overseeing lending activities. The second article, “Underwriting Trends and Other Highlights from the FDIC’s Credit and Consumer Products/Services Survey,” shares the recent credit survey results from examinations of FDIC-supervised financial institutions. The survey indicates that risk may be increasing in the industry based on reports of credit concentrations, increases in potentially volatile funding sources, and more “out-of-area lending.” In addition, the winter issue includes an overview of recently released regulations and supervisory guidance in its Regulatory and Supervisory Roundup.
CFPB succession update: Judge denies English’s motion
On January 10, Judge Timothy Kelley denied CFPB Deputy Director Leandra English’s request for a preliminary injunction to prevent OMB Director Mick Mulvaney from serving as the acting director of the CFPB. In his opinion, Judge Kelley emphasized that English failed to show a likelihood of success on the merits because, among other reasons, “[t]he best reading of the two statutes [at issue] is that Dodd-Frank requires that the Deputy Director ‘shall’ serve as acting Director, but that under the [Federal Vacancies Reform Act] the President ‘may’ override that default rule.” Additionally, in finding that English failed to demonstrate irreparable harm, Judge Kelley stated that “[t]he CFPB is not and will not be shuttered; it continues to operate with Mulvaney functioning as acting director” with “the backing of the CFPB’s General Counsel and senior management.” He concluded his opinion by stating:
There is little question that there is a public interest in clarity here, but it is hard to see how granting English an injunction would bring about more of it…. The President has designated Mulvaney the CFPB’s acting Director, the CFPB has recognized him as the acting Director, and it is operating with him as the acting Director. Granting English an injunction would not bring about more clarity; it would only serve to muddy the waters.
The decision follows a hearing on December 22, 2017, where Judge Kelley heard arguments from both parties, as previously covered by InfoBytes. While English’s requests have now been denied twice, as expected, she has filed an appeal to the U.S. Court of Appeals for the D.C. Circuit, which is also currently considering the challenge to the CFPB’s constitutionality by PHH Corporation.
In addition to the English litigation, Mulvaney and President Trump face similar arguments in a complaint brought by a credit union in the U.S. District Court for the Southern District of New York, as previously covered by InfoBytes here. On December 22, 2017, the defendants responded to the complaint with a motion to dismiss, arguing that the credit union does not have standing to sue, will not succeed on the merits, and will not suffer irreparable harm from the appointment. In its reply, the credit union added an additional argument that the CFPB’s decision to slow HMDA enforcement will remove the compliance incentive and HMDA data “will cease being reliable” to show compliance with the Community Reinvestment Act (“CRA”). The credit union asserts that banks deposit at their institution to meet CRA objectives but may cease to do so without an incentive to comply with HMDA. A hearing is scheduled for January 12.
As previously covered by InfoBytes, the CFPB issued a statement that supervisory examinations of 2018 HMDA data will be “diagnostic” to help “identify compliance weaknesses, and will credit good-faith compliance efforts” and that it does not intend to impose penalties with respect to errors reported in the 2018 data.
FDIC Fines Puerto Rican Bank for Flood Insurance Violations, Releases November Enforcement Actions
On December 29, the FDIC released a list of 29 administrative enforcement action orders taken against banks and individuals in November, as well as one termination order issued in October. The FDIC assessed a $153,000 civil money penalty against a Puerto Rican bank, citing 321 violations of the Flood Disaster Protection Act (FDPA) and the National Flood Insurance Act (NFIA) for (i) failing to notify borrowers that they were required to purchase flood insurance; and (ii) failing to obtain flood insurance on a borrower’s behalf in a timely fashion for those borrowers who failed to obtain insurance within 45 days after receiving notification. A second civil money penalty was issued against an Ohio-based bank for allegedly engaging in a pattern of violating requirements under the FDPA and NFIA, including by failing to obtain flood insurance at the time of origination.
Also on the list are consent orders issued against two banks related to unsafe or unsound banking practices, four Section 19 orders allowing applicants to participate in the affairs of an insured depository institution after having demonstrated “satisfactory evidence of rehabilitation,” five terminations of consent orders, and two adjudicated decisions, among others.
There are no administrative hearings scheduled for January 2018. The FDIC database containing all 30 enforcement decisions and orders may be accessed here.
CFPB Releases HMDA Tools; Updates HMDA Asset Threshold
On December 27, the CFPB announced the launch of a HMDA Check Digit Tool and a Rate Spread Calculator to assist financial institutions in the calculation of data field values required for reporting HMDA data. According to the CFPB, the HMDA Check Digit Tool and the Rate Spread Calculator will remain available to financial institutions throughout the 2018 collection period and beyond. As previously covered by InfoBytes, new HMDA data collection and reporting requirements under the amendments to Regulation C became effective January 1, 2018.
Also on December 27, the CFPB published a final rule increasing the asset-size exemption threshold under HMDA for financial institutions. As of January 1, 2018, banks, savings associations, and credit unions with assets of $45 million or less as of December 31, 2017 are exempt from collecting data in 2018. Regulation C requires the CFPB to adjust the asset threshold based on the year-to-year change in the average of the CPI–W (not seasonally adjusted) for each 12-month period ending in November, rounded to the nearest million. During the 12-month period ending in November 2017, the CPI–W increased by 2.1 percent, resulting in an increase in the threshold from $44 million to $45 million.
FHFA Requests Input on GSE Credit Score Requirements; Releases 2018 Scorecard
On December 20, the Federal Housing Financial Agency (FHFA) announced a Request for Input (RFI) seeking feedback from interested parties regarding how Fannie Mae and Freddie Mac (the GSEs) should update their current credit score requirements. Specifically, the GSEs plan to stop using the Classic FICO credit score model and to replace it with one of four options. These 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. The FHFA’s RFI asks interested parties to provide feedback on these options by responding to 22 questions outlined in the RFI by February 20.
On December 21, FHFA released the 2018 Scorecard outlining specific conservatorship priorities for the GSEs and their joint venture, Common Securitization Solutions, LLC (CSS). The 2018 Scorecard continues to identify many of the priorities outlined in the 2017 Scorecard. In addition, the 2018 Scorecard highlights the FHFA’s focus on gathering information to support its assessment of single-family rental strategies and extends the timeline for implementation of the Single Security Initiative on the Common Securitization Platform to the second quarter of 2019.
Arguments Heard in English Litigation; CFPB Announces Relaxed Compliance Requirements for HMDA; Other Proposed Rulemakings
On December 22, Judge Timothy Kelley heard arguments from both parties related to Leandra English’s litigation against President Trump and Mick Mulvaney. Judge Kelley did not rule on the matter at the close of the hearing. As previously covered by InfoBytes, English filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction on December 6.
In response to English’s new arguments, the defendants filed an opposition motion on December 18. Among other things, the response counters an argument—raised by English for the first time in her amended complaint—that the Federal Vacancies Reform Act (FVRA) cannot be used to appoint an acting CFPB Director because the Director is also a member of the FDIC. Defendants responded that the FVRA provision excluding appointments to independent multi-member boards or commissions only applies to direct appointments and not to positions that serve as “ex officio” members, as the CFPB Director does on the FDIC. The defendants go on to explain that English’s interpretation would prevent the use of FVRA to fill multiple Cabinet and other high-ranking Executive Branch positions that serve as ex officio members of independent agencies. The defendants also alleged that English failed to satisfy the requirements of the federal quo warranto statute – the exclusive means, according to the defendants, for directly challenging Mulvaney’s authority to perform as Acting Director of the CFPB. English replied to the defendant’s opposition motion on December 21.
Throughout the week, the CFPB took action regarding current and future rulemakings:
HMDA. On December 21, the CFPB issued a statement regarding compliance with the Home Mortgage Disclosure Act (HMDA) final rule and amendments to the HMDA final rule. Although the Bureau did not delay the January 1, 2018 effective date as some had hoped, it acknowledged the difficulties of coming into compliance with the new requirements, stating that the Bureau “does not intend to require data resubmission unless data errors are material or assess penalties with respect to errors for data collected in 2018 and reported in 2019.” According to the CFPB, compliance with the HMDA requirements pose “significant system and operational challenges” and therefore, institutions should focus the 2018 data collection on identifying areas for improvement in their HMDA compliance management systems for future years. The Bureau further advised that it expects that supervisory examinations of 2018 HMDA data will be “diagnostic” to help “identify compliance weaknesses, and will credit good-faith compliance efforts.” However, institutions will still use the CFPB’s new HMDA Platform for data collected in 2017. The FDIC and the OCC issued similar announcements, Financial Institution Letter FIL-63-2017 and OCC Bulletin 2017-62 respectively, and other regulators are expected to do the same.
The Bureau’s stated intent to focus on “good-faith compliance efforts” and “material” errors in the early days of the new HMDA requirements is similar to the approach taken for implementation of the Ability-to-Repay/Qualified Mortgage Rule and the TILA-RESPA Integrated Disclosure Rule. While this flexible approach is generally beneficial for lenders and consumers, it does produce some uncertainty over what will be considered “good faith” or “material.”
The Bureau also announced its intent to engage in additional HMDA rulemaking that may (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required in HMDA, as amended by the Dodd-Frank Act.
Prepaid Accounts. On December 21, the CFPB also issued a statement on the final rule covering prepaid accounts and the proposed amendments to that rule. In the statement, the CFPB announced that it intends to adopt final amendments “soon after the new year” and that it expects to further extend the April 1, 2018 effective date to allow more time for implementation. The Bureau did not give details on the nature of the amendments or the length of the expected extension.
Debt Collection. On December 14, OMB released a Notice of Action, which reflected that the CFPB withdrew its plan to conduct a survey related to debt collection disclosures of 8,000 individuals. According to OMB’s notice, the CFPB withdrew the plan because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”
House Passes Legislation Modifying Systemic Risk Designation Requirements
The House voted 288-130 on December 19 to pass legislation modifying Dodd-Frank Act asset requirements for systemic risk designations of bank holding companies. Under H.R. 3312, the Systemic Risk Designation Improvement Act of 2017, bank holding companies that are subject to increased capital requirements and heightened supervision by the Federal Reserve (Fed) will no longer be automatically designated as systemically important financial institutions (SIFIs) if their asset threshold is $50 billion or greater. Instead, the Fed will review a bank holding company’s size, interconnectedness, infrastructure, “global cross-jurisdictional activity,” and complexity to determine whether it should be designated as a SIFI. Relatedly, the Senate Banking Committee is currently considering a separate measure, S. 2155, which would, among other things, increase the SIFI asset threshold to $250 billion.
Fannie and Freddie Extend Foreclosure Suspension for Puerto Rico and U.S. Virgin Islands
On December 20, Fannie Mae, in Lender Letter LL-2017-11, and Freddie Mac, in Guide Bulletin 2017-29, extended the suspension of foreclosure sales through March 31, 2018 of mortgaged properties in FEMA-declared disaster areas in Puerto Rico and the U.S. Virgin Islands due to Hurricanes Irma and Maria. The extension does not apply to any other jurisdictions similarly designated.
Find continuing InfoBytes coverage on Disaster Relief here.
Financial Regulators Issue Joint Supervisory Guidance for Disaster Areas; VA Announces Wildfire Relief
On December 15, the FDIC, Fed, OCC, and NCUA issued Interagency Supervisory Examiner Guidance for Institutions Affect by a Major Disaster (Guidance). The Guidance provides information on assessing the financial condition of institutions affected by a “major disaster with individual assistance” as declared by the President. The Guidance also encourages institutions affected by such disasters to discuss relevant issues with their examiners and notes that the supervisory agencies will consider extending report filing deadlines and rescheduling exams. Additionally, the Guidance states that examiners should consider factors related to the disaster, such as asset losses and staffing issues, when assessing capital adequacy and management capability requirements. And when considering the supervisory response to an institution that receives a lower component or composite rating, the Guidance provides that examiners should recognize the extent to which any weaknesses are related to the major disaster.
The Department of Veterans Affairs (VA), on December 12, announced additional special relief following the California wildfires in Circular 26-17-42. The Circular encourages VA loan holders to extend forbearance to borrowers affected by the wildfires and VA loan servicers to continue solicitation of the VA Disaster Loan Modification program (as previously covered by InfoBytes here). Additionally, for affected borrowers and loans, the Circular suggests that loan holders follow the 90-day foreclosure moratorium and that servicers consider waiving late charges and suspending credit reporting. The Circular is effective until January 1, 2019.
Find continuing InfoBytes coverage on Disaster Relief here.
OCC Recent Enforcement Actions Target BSA/AML Compliance Programs and National Flood Insurance Act Violations
On December 14, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such parties. The new enforcement actions include cease and desist orders, civil money penalty orders, removal/prohibition orders, and restitution orders. The list also includes recently terminated enforcement actions.
Cease and Desist Order. On November 9, the OCC issued a consent order (2017 Order) two days after converting a Japanese bank’s two New York branches under the supervision of the New York Department of Financial Services (NYDFS) to federally licensed branches under the supervision of the OCC. As part of the OCC’s approval process, the bank’s federal branches and New York branches agreed to the issuance of the 2017 Order, which requires adherence to “remedial provisions . . . substantively the same as those” in consent orders entered into in 2013 and 2014 with NYDFS. The previously issued consent orders addressed deficiencies related to the bank’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) sanctions compliance programs, specifically concerning the removal of key warnings to regulators on transactions with sanctioned countries.
The 2017 Order, among other things, requires the bank to: (i) submit an action plan on enhancing internal controls and updating policies and procedures to correct BSA/AML deficiencies, address provisions applicable under the Office of Foreign Assets Control’s requirements, and implement requirements outlined in the 2013 and 2014 consent orders; (ii) ensure adherence to the action plan and 2017 Order under the direction of the bank’s general manager; (iii) submit a management oversight plan designed to improve and enhance the bank’s sanctions compliance programs; and (iv) prevent the retention or future engagement of any individual identified and “barred by the 2014 Consent Order from engaging, directly or indirectly, in any duties, responsibilities, or activities at or on behalf of the [b]ank or the [b]ank’s affiliates that involve their banking business in the [U.S.].” The 2017 Order does not require the bank to pay a civil monetary penalty.
Civil Monetary Penalty. On October 10, the OCC assessed a $452,000 civil monetary penalty against a national bank lender for alleged violations of the National Flood Insurance Act and/or the Flood Disaster Protection Act. The bank agreed to pay the penalty without admitting or denying any wrongdoing.