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CSBS Publishes Annual Report
On May 1, the Conference of State Bank Supervisors (CSBS) published its 2013 annual report, which aggregates and reviews the organization’s activities in the prior year, identifies future goals for the organization, and outlines specific priorities for 2014. Those priorities include, among others, continuing to coordinate with federal regulators on cybersecurity and with the CFPB on complaint sharing. The report also includes more detailed reports on past and future activities by various CSBS divisions and boards, including a report from the Policy and Supervision Division that reviews the CSBS’s legislative and regulatory policy positions, and its bank supervision and consumer protection and non-bank supervision activities.
CFPB Report Recaps Fair Lending Activities
On April 30, the CFPB published its second annual report to Congress on its fair lending activities. According to the report, in 2013 federal regulators referred 24 ECOA-related matters to the DOJ—6 by the CFPB—as opposed to only 12 referrals in 2012. The report primarily recaps previously announced research, supervision, enforcement, and rulemaking activities related to fair lending issues, devoting much attention to mortgage and auto finance. However, the Bureau notes that it is conducting ongoing supervision and enforcement in other product markets, including credit card lending. The Bureau also identifies the most frequently cited technical Regulation B violations.
With regard to housing finance supervision and enforcement, the CFPB reports that while many lenders have strong compliance management systems and no violations, the CFPB’s ECOA baseline reviews have identified factors that indicate heightened fair lending risk at some institutions, including weak or nonexistent fair lending CMS, underwriting and pricing policies that consider prohibited bases in a manner that presents fair lending risk, and inaccurate HMDA data. The CFPB referred three mortgage-related cases to the DOJ. Two of those involved findings that a mortgage lender discriminated on the basis of marital status; the DOJ deferred to the Bureau’s handling of the merits of both. The third contained findings that a mortgage lender discriminated on the basis of race and national origin in the pricing of mortgage loans. That referral led to a joint DOJ-CFPB enforcement action.
In the area of auto finance, the report highlights the CFPB’s auto finance forum and March 2013 auto finance bulletin, and again defends the CFPB’s proxy methodology, which has been challenged by members of Congress and industry since the CFPB issued its auto finance bulletin. The CFPB states that it is currently investigating whether a number of indirect auto financial institutions unlawfully discriminated in the pricing of automobile loans, particularly in their use of discretionary dealer markup and compensation policies using a disparate impact analysis. During the reporting period, the Bureau made one referral to the DOJ, and subsequently took joint enforcement action with the DOJ against that indirect auto financial institution for alleged violations of ECOA.
The report indicates that the Bureau has expanded its focus beyond mortgage and auto finance, noting that the CFPB is conducting ECOA Baseline Reviews and ECOA Targeted Reviews of consumer financial services providers of other products, singling out credit cards as an example. The report adds that the CFPB also referred to DOJ three matters related to unsecured consumer lending, but that DOJ declined to act upon such referrals.
OCC Proposes Large Bank Assessment Increase
On April 28, the OCC published a proposed rule that would increase assessments on national banks and federal savings associations with total assets over $40 billion. The OCC proposes to increase the marginal assessment rate for such institutions by 14.5% beginning September 30, 2014; specific assessments would range from 0.32% to 14%, depending on the total assets of the institution as reflected on its June 30, 2014 call report. The average increase in assessments for covered institutions would be 12%. The OCC attributes the increased assessments to new supervisory and regulatory initiatives that require additional resources, with most of those resources allotted for large bank supervision and regulation. The OCC notes it did not raise marginal rates on the assets of these institutions between 1995 and 2013, and lowered marginal rates for these institutions in 2008 when it added a new asset bracket for assets in excess of $250 billion. Comments on the proposed rule are due June 12, 2014.
Banking Agencies Issue Revised CRA Exam Procedures
On April 18, the OCC, FDIC, and Federal Reserve Board released revised Community Reinvestment Act (CRA) examination procedures applicable to institutions with total assets greater than $1.202 billion as of December 31 of either of the previous two calendar years. The procedures incorporate revisions to the CRA interagency questions and answers issued in November 2013. Those revisions generally were 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.
Federal Reserve Board Revises Guidance For Examiners On Loan Sampling
On April 18, the Federal Reserve Board issued SR 14-4 which updates the Federal Reserve’s loan sampling expectations for state member bank and credit extending nonbank subsidiaries of banking organizations with $10-$50 billion in total consolidated assets. Depending on the structure and size of subsidiary state member banks, the guidance permits examiners to apply the guidance applicable to smaller state member banks when a bank’s subsidiary’s total assets are below $10 billion. The guidance (i) details the loan sampling methodology to be employed by Reserve Banks during the supervisory process; (ii) calls for documentation of loan sample selection methods in scoping memoranda and in the confidential section of the report of examination; and (iii) outlines expectations for following up on examinations with adverse findings. The guidance supersedes the examiner loan sampling expectations described in SR 94-13, “Loan Review Requirements for On-site Examinations.”
Federal Reserve OIG Criticizes CFPB's Supervision Program
On April 1, the Federal Reserve Board’s Office of Inspector General (OIG), which also is responsible for auditing the CFPB, issued a report that is critical of the CFPB’s supervisory activities and recommends that the CFPB take specific actions to strengthen its supervision program. The report shares concerns raised by entities having been through the examination process.
The report covers the CFPB’s supervisory activities from July 2011 through July 2013, including 82 completed examinations (excluding baseline reviews), which yielded 35 reports of examination and 47 supervisory letters. Of those 82 completed examinations, 63 were of depository institutions, and 19 were of nondepository institutions.
Among the findings, the OIG concludes that:
- The CFPB failed to meet reporting timelines. CFPB staff routinely failed to meet internal timeliness requirements for submitting draft examination products to headquarters. These failures resulted in a “significant number of examinations outstanding for longer than 90 days,” which the OIG believes creates unacceptable uncertainty for supervised institutions.
- The CFPB failed to consistently use standard compliance rating definitions. In two out of eight examinations sampled, CFPB staff edited standard ratings definitions to omit information and add qualifying language, including in one ECOA examination report altering the FFIEC’s definition for a 3 rating to state that no “overt” discriminatory acts or practices were identified. In that instance, examiners flagged as a potential fair lending violation the discretion accorded the institution’s customer service representatives to grant fee waivers. The CFPB required the institution to create policies and procedures that limit the discretion of customer service representatives to grant fee waivers, but the examination report did not indicate “whether the CFPB identified any discriminatory acts or practices, suggesting that the CFPB did not reach a definitive conclusion as to whether fee waivers had been granted on a discriminatory basis.” The OIG concluded that “inserting the word ‘overt’ creates the appearance that the CFPB deviated from the standard template language to qualify its rating of the supervised institution, calling into question the appropriateness of the assigned rating.” The report states that the CFPB has since reviewed examination ratings and determined that adjustments were not necessary.
- The CFPB failed to timely record examination milestones. The report states that the CFPB has not adopted a requirement for the timely recording of examination data. To assess timeliness, the OIG used seven days as a standard. The OIG found that at least 25% of examination milestones were not recorded within seven days, and that in eight instances, examination milestones were not recorded for more than 200 days after their occurrence. In addition, CFPB staff entered dates before the milestone occurred 109 times.
- The CFPB’s examination reporting policy is not current. The report states that the CFPB has not updated its examination reporting policy since the CFPB reorganized its supervision offices in December 2012. In addition, the policy does not reflect the CFPB’s current definition for the “completion of field work”, which is a key milestone because it initiates the reporting process. Notably, a senior CFPB official advised the OIG that the CFPB is still determining the most effective process for reviewing examination reports.
- The CFPB and prudential regulators can improve coordination. The report notes that the CFPB and prudential regulators do not formally share supervisory actions documented outside of an examination report, which excludes prudential regulators from commenting on other supervisory actions. The OIG notes that only 19% of closed examinations of depository institutions resulted in reports of examination, and that of the CFPB’s examinations of depository institutions that resulted in a matter requiring attention, only 30% were documented in reports of examination. The remaining 70% were documented in supervisory letters or baseline reviews and, therefore, were not formally shared with the prudential regulators. Further, for institutions subject to continuous monitoring, the CFPB states that it shares findings with the prudential regulator at the end of the examination cycle. The OIG observes, however, that as of July 2013, none of the continuous full-scope examinations had been finalized or shared with the prudential regulators. The OIG believes that the CFPB’s current approach increases the risk that regulators will not receive important supervisory information and increases the likelihood of duplication of efforts and other inefficiencies.
The OIG also found that (i) the CFPB did not consistently retain evidence of required communication with prudential regulators; (ii) the CFPB regions use different and inconsistent practices for scheduling examination staff and do not track examination staff hours; and (iii) the CFPB has not finalized its examiner commissioning program.
The report states that since the OIG completed its field work in October 2013, the CFPB has assured the OIG that it has taken steps to address certain of the findings, including streamlining the report review process and reducing the number of examination reports that have not been issued. The OIG plans to conduct follow-up activities to assess whether the CFPB’s subsequent actions address the OIG’s findings and recommendations.
Virginia Enacts Banking, Consumer Finance Bills
Over the past week, Virginia Governor Terry McAuliffe signed several bills impacting banks and certain consumer finance providers. The first bill, HB 358 repealed a state law that that barred out-of-state banks from opening de novo branches in Virginia unless the bank's home state provided reciprocal access to Virginia banks. The change will allow out-of-state banks to establish branches in Virginia on the same basis as state-chartered banks. A second banking bill, HB 1062, provides that an existing statutory provision requiring the Virginia State Corporation Commission to ascertain that certain minimum capital stock requirements are met prior to issuing a certificate of authority to a bank does not apply to the Commission’s issuance of such a certificate to a bank holding company or to a resulting bank in connection with certain types of mergers involving the holding company and its subsidiary bank. A third bill, HB 69, amends state law to expand the types of services that may be provided under an extended motor vehicle service contract and to authorize the Board of Agriculture and Consumer Services to designate additional services that may be provided under an extended service contract. The bill also provides that extended service contracts are not insurance subject to state regulation as such. The above approved bills will take effect on July 1, 2014. Finally, the Governor approved a bill passed by the General Assembly, HB 954, which would permit the State Corporation Commission to issue transitional mortgage loan originator licenses.
Prudential Regulators Finalize Midsize Bank Stress Test Guidance
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.
UK FCA Identifies Additional Improvements For Retail Banks' Sales Incentive Schemes
On March 4, the UK FCA released the results of its most recent review of sales incentives at retail financial firms. The FCA’s review revealed that retail banks have made progress in changing their financial incentive structures in response to the FCA’s supervisory focus on the issue starting in September 2012, which led to new guidance issued in January 2013. The FCA’s initial focus on the issue derived from its concerns about incentive structures that, among other things, allegedly fueled the sale of payment protection plans and other add-on products. Despite the broad progress, the FCA reports that roughly one in 10 firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing the risk properly at the time of the FCA’s assessment. It believes firms should concentrate on, among other things (i) checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk; (ii) better monitoring behavior in face-to-face sales conversations; and (iii) managing risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused. The FCA states that given the progress made, it is not proposing any rule changes at this time, but it intends to keep financial incentives on its agenda for 2014.
Federal Reserve Board Chair Testifies On Enforcement Policy, Virtual Currency Oversight
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there's no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”