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CSBS proposes prudential standards for state-licensed nonbank mortgage servicers
On October 1, the Conference of State Bank Supervisors (CSBS) requested public comment on proposed regulatory prudential standards for nonbank mortgage servicers. According to CSBS, the proposal is being issued to address concerns about nonbank mortgage servicers, including the rapid market share growth, institution size, and financial stability and governance. The goals of the proposal are to (i) “[p]rovide better protection for borrowers, investors and other stakeholders in the occurrence of a stress event. . .[that] could result in harm”; (ii) “[e]nhance effective regulatory oversight and market discipline over these entities”; and (iii) “[i]mprove transparency, accountability, risk management and corporate governance standards.” Highlights of the proposal include:
- Baseline Standards. CSBS notes that the baseline standards, which cover eight areas—capital, liquidity, risk management, data standards and integrity, data protection/cyber risk, corporate governance, servicing transfer requirements and change of control—will represent regulatory requirements for state-licensed nonbank mortgage servicers and will “leverage existing standards or generally accepted business practices” in order to minimize the regulatory burden.
- Enhanced Standards. CSBS is proposing enhanced standards that would apply to servicers owning whole loans plus mortgage servicing rights (MSRs) totaling the lesser of $100 billion or representing at least a 2.5 percent total market share based on Mortgage Call Report quarterly data of licensed nonbank owned whole loans and MSRs (known as “Complex Servicers”). The enhanced standards would be applied to capital, liquidity, stress testing and living will/recovery and resolution planning. Additionally, the proposal notes that regulators may determine a nonbank mortgage servicer that does not meet the definition of Complex Servicer is still subject to the enhanced standards based on “a unique risk profile, growth, market importance, or financial condition of the institution.”
Comments on the proposal are due by December 31.
Fed proposes updates to capital planning requirements
On September 30, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) to tailor the requirements in the Fed’s capital plan rule applicable to large bank holding companies and U.S. intermediate holding companies of foreign banking organizations. The changes would conform the capital planning, regulatory reporting, and stress capital buffer requirements for firms with $100 billion or more in total assets (Category IV) with the tailored regulatory framework approved by the Fed last October (covered by InfoBytes here). The NPRM would also make additional changes to the Fed’s stress testing rules, stress testing policy statement, and regulatory reporting requirements related to “business plan change assumptions, capital action assumptions, and the publication of company-run stress test results for savings and loan holding companies” to be consistent with a final rule issued last year that amended resolution planning requirements for large domestic and foreign firms (covered by InfoBytes here). These changes include removing company-run stress test requirements and implementing biennial, rather than annual, supervisory stress tests for firms subject to Category IV standards. Additionally, the Fed seeks comments on its existing capital planning guidance for firms of all sizes. Notably, the Fed states that the NPRM would not affect the calculation of firms’ capital requirements. Comments on the NPRM are due November 20.
Federal Reserve Board extends measures to ensure high level of resilience among large banks
On September 30, the Federal Reserve Board announced it would extend measures previously instituted to ensure that large banks maintain a high level of capital resilience in light of uncertainty introduced by the Covid-19 outbreak. The measures were extended for an additional quarter. Large banks (i.e. banks with more than $100 billion in total assets) will be prohibited from making share repurchases. Additionally, dividend payments will be capped and tied to a formula based on recent income. The announcement notes that the Board will conduct a second stress test later this year to further test the resiliency of large banks.
OCC releases recent enforcement actions
On July 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included among the actions is a June 23 consent order, which resolves OCC claims that a California-based bank violated a 2016 consent order concerning Bank Secrecy Act/anti-money laundering compliance program deficiencies. According to the OCC, the bank failed to timely comply with the 2016 consent order and is required to pay a $100,000 civil money penalty. The list also includes a July 25 civil money penalty order against a New York-based bank, which requires the payment of $43,000 for an alleged pattern or practice of violations of the Flood Disaster Protection Act and its implementing regulations.
Additionally, an Iowa-based bank and the OCC reached a formal agreement on June 16 for alleged unsafe or unsound practices related to, among other things, credit underwriting, credit administration, problem loan management, and real estate valuation practices. Among other conditions, the agreement requires the bank to (i) appoint a compliance committee to ensure adherence to the agreement’s provisions; (ii) establish a three-year strategic plan outlining goals and objectives related to the bank’s risk profile and liability structure; (iii) submit a commercial and retail credit underwriting and administration program to ensure the bank “analyzes credit and collateral information sufficient to identify, monitor, and report the [b]ank’s credit risk, properly account for loans, and assign accurate risk ratings in a timely manner”; (iv) implement programs providing for an annual review of loans, loan level stress testing, and problem loan management; (v) implement an exception tracking and reporting system; and (vi) establish an appraisal and evaluation program.
Federal Reserve announces temporary revisions to Capital Assessment and Stress Testing Reports
On July 8, the Federal Reserve announced revisions to its Capital Assessments and Stress Testing Reports, Form FR Y-14A/Q/M; OMB No. 7100-0341. The temporary revisions implement changes in response to the Covid-19 pandemic, including the incorporation of data related to certain aspects of the CARES Act, the Paycheck Protection Program, and Federal Reserve lending facilities. The changes apply to reports beginning with July 31, 2020, or September 30, 2020, as-of dates. Additionally, the Federal Reserve has temporarily revised the submission frequency of FR Y–14Q, Schedule H (Wholesale) from a quarterly basis to a monthly basis for Category I–III firms, effective July 31, 2020.
Fed: Large banks “sufficiently capitalized” for Covid-19 stress
On June 25, the Federal Reserve Board released the results of the Dodd-Frank Act stress tests for 2020 (DFAST 2020) and another report analyzing additional sensitivities due to the Covid-19 pandemic. The additional sensitivities report assessed the resiliency of large banks under three hypothetical recessions, which could result from the Covid-19 pandemic. Overall, under the hypothetical scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion in the sensitivity analysis, and aggregate capital ratios declined from 12 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent. The Fed concludes that due to strong current capital levels, “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios.” The Fed notes that this analysis did not incorporate the effects of government stimulus payments or expanded unemployment insurance. In response to the results, the Fed notes that all large banks are now required to, among other things, resubmit their capital plans later this year to reflect the current stresses, and the Fed intends to conduct additional analysis each quarter to determine if other response adjustments are needed.
Additionally, the results of the full DFAST 2020—which was designed prior to the Covid-19 pandemic—suggest that the 33 banks subject to the test would “experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis.”
Fed vice chairman discusses stress testing adaptability due to Covid-19 pandemic
On June 19, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at a meeting of the Women in Housing and Finance regarding adjustments to the Fed’s periodic stress testing of large banks in the wake of Covid-19. Quarles explained that because the Fed lacked the time and comprehensive data to run a complete and updated Covid-19 event stress test this year, the Fed made the decision to continue with the “severely adverse scenario” begun in February 2020, while also performing a new “sensitivity analysis.” The sensitivity analysis considers three distinct downside risk paths for the economy—a rapid recovery, a slower recovery, and a W-shaped double-dip recession.
As in past years, the Fed intends to disclose annual stress test results using the February 2020 scenario (run against bank exposures as of December 2019), which will include both firm-specific and aggregate results. Quarles also indicated the Fed would be disclosing some results from the new sensitivity analysis. According to Quarles, these results will not be firm-specific, but will be “aggregated across banks comparing how the banking system as a whole would fare under the three distinct views of the future.” The Fed also plans to “move ahead and provide all banks subject to stress testing with a stress capital buffer requirement based on the February 2020 scenario, under [the Fed’s] new approach integrating stress testing with capital requirements.” Once banks determine their final plans, the Fed will publicly release the final capital requirements for each individual bank later this year before they take effect in the fourth quarter as planned. Quarles also noted that additional policy actions, if warranted, may be taken in the coming months as the Fed continues to monitor the economic conditions.
OCC issues Comptroller’s Handbook booklet updating interest rate risk
On March 26, the OCC issued Bulletin 2020-26 announcing the revision of the Interest Rate Risk booklet of the Comptroller’s Handbook, which replaces the June 1997 version of the same name. The revised booklet “incorporates and reflects applicable statutes and regulations, guidance, and examination procedures,” and expands model risk and model risk management discussions, “including developing, reviewing, and stress testing model assumptions.” The revised booklet also provides guidelines “consistent with the Pillar 2 supervisory approach outlined in the Basel Committee on Banking Supervision’s Interest Rate Risk in the Banking Book.”
FHFA final rule amends stress testing requirements
On March 24, the FHFA published a final rule amending its stress testing requirements consistent with changes made by section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule adopts amendments proposed last December (covered by InfoBytes here) without change, increasing the minimum threshold for FHFA-regulated entities to conduct stress tests from $10 billion to $250 billion in total consolidated assets, removing the requirements for Federal Home Loan Banks to conduct stress tests, and reducing the number of stress test scenarios from three to two by removing the “adverse” scenario. The final rule took effect March 24.
NCUA issues FAQs regarding Covid-19 and credit union operations
On March 25, the National Credit Union Administration (NCUA) issued FAQs regarding the impact of Covid-19 on the NCUA and credit union operations. The FAQs answer questions regarding, among other things, flexibility for federal credit unions in planning annual meetings and monthly board of director meetings, restrictions on access to or closure of facilities, the impact of Covid-19 on the NCUA’s examination and supervision program, and deadlines for submission of certain filings (e.g., Call Reports, annual capital plan and/or stress testing, Bank Secrecy Act reports).