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New York Fed report finds CFPB oversight does not significantly reduce volume of mortgage lending
The Federal Reserve Bank of New York (New York Fed) released a June 2018 Staff Report titled “Does CFPB Oversight Crimp Credit?” which concludes that there is little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. The report compared the lending outcomes of companies subject to CFPB oversight with smaller institutions below $10 billion in total assets that are exempt from CFPB supervision and enforcement activities, as well as lending outcomes before and after the CFPB’s creation in July 2011. Using HMDA data, bank balance sheets, and bank noninterest expenses, the report concluded, among other things, that (i) CFPB oversight may have changed the composition of lending—supervised banks originated fewer loans to lower-income, lower-credit score borrowers; (ii) there has been a drop in lending to borrowers with no co-applicant by CFPB supervised banks; and (iii) there has been an increase in origination of “jumbo” mortgage loans by CFPB supervised banks. The report noted that its results do not speak to the effect of the CFPB’s rulemaking, such as the TILA-RESPA integrated disclosure rule.
Comptroller Otting discusses regulatory priorities during congressional testimonies
On June 13 and 14, Comptroller of Currency Joseph Otting appeared before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs to discuss his priorities as Comptroller. As highlighted in the identical press releases for both House and Senate hearings, Otting testified about the OCC’s achievements and efforts since being sworn in as Comptroller in November 2017. Among other things, Otting discussed the agency’s efforts to (i) modernize the Community Reinvestment Act (CRA); (ii) promote compliance with the Bank Secrecy Act and anti-money laundering regulations (BSA/AML); and (iii) simplify the Volcker Rule, particularly for small and mid-size banks. Otting emphasized in his written testimony that his priority is to reduce the regulatory burden on financial institutions, specifying that the CRA requirements have become "too complex, outdated, cumbersome, and subjective." To that end, Otting stated that the OCC, in coordination with other federal agencies, is preparing an advance notice of proposed rulemaking to gather information on potential CRA updates, which, in Otting’s view, should include (i) expanding the types of activities that are eligible for CRA credit; (ii) changing assessment areas so they are not based solely on where the bank has a physical presence; and (iii) providing clearer metrics. As for BSA/AML, Otting noted this was his “number two issue” behind reforming the CRA and the working group—the OCC, FinCEN, the FDIC, the Federal Reserve, and NCUA— will likely address key issues like de-risking and improvement of transparency over the next three to six months. Otting noted his pleasure with the Volcker Rule changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/ P.L. 115-174) but cautioned that fine-tuning may be necessary as the OCC proceeds with implementation.
OCC issues bulletin on supervisory policy and processes for CRA performance evaluations
On June 15, the OCC issued Bulletin 2018-17, which clarifies the agency’s supervisory policies and processes regarding how examiners evaluate and communicate the performance of national banks, federal savings associations, and federal branches and agencies under the Community Reinvestment Act (CRA). The OCC issued these clarifications as part of its ongoing modernization efforts and explained that they are intended to promote the consistency and effectiveness of CRA performance evaluations. The Bulletin addresses policy clarifications for several areas of CRA evaluations, which are effective immediately, such as (i) implementation of full-scope and limited-scope reviews; (ii) consideration of activities that promote economic development; (iii) use of demographic, aggregate, and market share data; and (iv) evaluation frequency and timing. The Bulletin also provides clarifications on standard processes which became effective in May 2017, including, among other things, (i) factors considered when evaluating bank performance under small- and large-bank lending tests; and (ii) information considered and included in the written performance evaluation. The OCC noted that “[t]hese policies and processes apply to the evaluations of all OCC-supervised banks subject to the CRA, regardless of the bank’s asset size or CRA evaluation type.”
Fed issues proposal to amend internal appeals process
On February 27, the Federal Reserve Board (Board) published proposed amendments to its guidelines on the internal appeals process for institutions that receive an adverse material supervisory determination. According to the proposal, the goal of the amendments is to improve and expedite the appeals process, which was established in 1995 and applies to any material supervisory determination, including matters related to an examination or inspection, which does not have an alternative, independent appeals process. The current guidelines allow for an institution to file a written appeal, which will be reviewed by a panel selected by the Federal Reserve Bank (Bank). The panel is made up of persons who are not employed by the Bank and have no affiliation with the material supervisory determination in question. Institutions also have further appeal rights to the Bank’s president and then a member of the Board. Proposed changes to the process include:
- reducing the number of appeal levels to two and providing a separate independent review at both appeal levels;
- establishing an accelerated process for appeals that relate to institutions becoming “critically undercapitalized” under the Prompt Corrective Action (PCA) framework as a result of the material supervisory determination, in order to ensure the review occurs within the required PCA timeframe; and
- instituting specific standards of review at both appeals stages. The first panel of review would be required to review the documentation “as if no determination had previously been made.” The final panel, made up primarily of Board staff, would review whether the initial appeals determination is “reasonable and supported by a preponderance of the evidence in the record,” and the decision of the final review panel would be made public.
The proposed amendments also contain changes to the Board’s Ombudsman policy, which, among other things would allow the Ombudsman—if requested by the institution or Federal Reserve personnel—to attend hearings or deliberations relating to the appeal as an observer. The proposal also would formalize many of the Ombudsman’s current activities, including receiving all complaints related to the Board’s supervisory process and facilitating informal resolution of institution’s concerns.
CFPB Succession: CFPB releases five-year strategic plan; Trump’s budget proposal suggests cuts
On February 12, the CFPB released its five-year strategic plan, which establishes the agency’s long-term strategic goals with corresponding objectives and achievement strategies. The strategic plan also introduces a new stated mission for the CFPB, which is based on Sections 1011(a) and 1013(d) of the Dodd-Frank Act:
“To regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws and to educate and empower consumers to make better informed financial decisions.”
The new mission focuses on regulation and education but is silent on enforcement, as compared to the Bureau’s previous mission:
“The CFPB helps consumer financial markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”
In addition to the mission, with the exception of the achievement strategies, the plan’s goals and corresponding objectives are all also restatements of various sections of title X of the Dodd-Frank Act. According to the plan, the Bureau will act with “humility and moderation” in achieving the three stated goals, which are:
- “Ensure that all consumers have access to markets for consumer financial products and services.”
- “Implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive.”
- “Foster operational excellence through efficient and effective processes, governance and security of resources and information.”
Notable, are the strategies the Bureau has outlined to achieve its goals and objectives. Among others, these strategies include, (i) reviewing individual regulations for clarification opportunities and considering alternative approaches to regulation; (ii) enhancing institutional regulatory compliance to protect consumers from discrimination and UDAAP violations; (iii) focusing enforcement resources on institutions and product lines that pose the greatest risk to consumers; (iv) promoting the development of compliance technology solutions. The strategic plan also focuses on internal strategies to achieve the Bureau’s mission, such as, maintaining a responsive cybersecurity program and promoting budget discipline.
The final strategic plan is a significant rewrite of the draft strategic plan published in October 2017 under the Bureau’s previous leadership (covered by InfoBytes here). The final plan represents a “more coherent strategic direction” compared to the draft version, according to a letter written by acting Director Mick Mulvaney, which accompanies the final plan.
On the same day as the strategic plan was released, President Trump issued his 2019 budget proposal which outlines a plan to place the CFPB under the congressional appropriations process, cut the Bureau’s budget by more than $6 billion over 10 years, and restrict the Bureau’s enforcement authority of federal consumer financial laws. More InfoBytes details about the budget proposal are available here.
CFPB releases RFI on supervision process
On February 14, the CFPB released its fourth Request for Information (RFI) in a series seeking feedback on the Bureau’s operations. While prior RFIs have focused on various aspects of the Bureau’s enforcement process, this RFI solicits public comment on “how best to achieve meaningful burden reduction or other improvement to the processes used by the Bureau to supervise for compliance with Federal consumer financial law.” The RFI broadly requests feedback on all aspects of the supervision process but also highlights specific topics on which comment is requested, including (i) timing, frequency, and scope of examinations; (ii) timing and process of the pre-exam information request, including type and volume of information requested; (iii) effectiveness and accessibility of the CFPB exam manual; (iv) usefulness and content of the potential action and request for response (PARR) letter; (v) clarity and timing requirements associated with matters requiring attention (MRA), as well as the use of third parties to conduct assessments specified in MRAs; (vi) the Bureau’s provision of information about supervisory actions in its Supervisory Highlights publication; and (vii) how the Bureau should coordinate its supervisory activity with federal or state agencies with overlapping jurisdictions. The RFI is expected to be published in the Federal Register on February 20. Comments will be due 90 days from publication.
Federal Reserve vice chairman evaluates post-crisis regulations
On January 19, Federal Reserve Vice Chairman for Supervision Randal Quarles spoke at the American Bar Association Banking Law Committee Annual Meeting to discuss his initial observations on the post-crisis regulation regime and provide a status update on the Fed’s key areas of focus for improving the “efficiency, transparency, and simplicity of regulation.” Quarles emphasized that there are a variety of means to improve efficiency, such as (i) addressing unintended adverse consequences of a regulation, or (ii) calibrating a regulation “more precisely to the risks in need of mitigation.” Transparency around rulemaking encourages a variety of perspectives, and simplifying regulations “promotes public understanding of regulation, promotes meaningful compliance by the industry with regulation, and reduces unexpected negative synergies among regulations,” he added.
According to Quarles, “small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification” are common ground areas for improvement, efforts have progressed, and regulations have been proposed for changes, including extending the resolution planning cycle to reduce the reporting burden. Quarles also noted that the Fed expects to release a proposal on leverage ratio recalibration in the near future, and has started working with five banking agencies on a proposal to streamline the Volcker rule.
Another area of focus Quarles highlighted is the Fed’s plan to revisit the “advanced approaches” thresholds used to identify internationally active banks, including risk-based capital requirements as well as the supplementary leverage ratio. Quarles further noted that the current $250 billion-asset or $10 billion in on-balance-sheet foreign exposures thresholds were formulated more than a decade ago “and have not been refined since then.” Additionally, Quarles announced plans to work with his Fed colleagues to simplify the framework for loss absorbency requirements. According to Quarles, candidates for simplification include (i) eliminating the advanced approaches risk-based capital requirements; (ii) eliminating one or more stress testing ratios; and (iii) modifying the total loss-absorbing capacity requirements. The framework for making determinations of control under the Bank Holding Company Act—while not a post-crisis regulation—could also be improved to be less “burdensome and time-consuming,” Quarles added.
Finally, as previously covered in InfoBytes, Quarles commented on the Fed’s requests for comments issued last December on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. “I believe that the disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm's binding capital constraint,” Quarles noted.
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.
Buckley Sandler Insights: Fed's LFI Risk Management Principles Open for Comments
On January 4, the Federal Reserve (Fed) issued for public comment proposed guidance setting forth core principles of effective risk management for Large Financial Institutions (“LFI”s) (“Risk Management proposal”). Given that it is increasingly likely that Congress will release financial institutions with assets below $250 billion from “SIFI” designation, the Fed’s guidance yesterday is a further effort to ensure that risk at LFIs will continue to be managed well even after many of them are no longer subject to other SIFI obligations. The proposal would apply to domestic bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more; the U.S. operations of foreign banking organizations (“FBOs”) with combined U.S. assets of $50 billion or more; and any state member bank subsidiary of these institutions. The proposal would also apply to any systemically important nonbank financial company designated by the Financial Stability Oversight Council (“FSOC”) for Fed supervision. The proposed guidance clarifies the Fed’s supervisory expectations of these institutions’ core principals with respect to effective senior management; the management of business lines; and independent risk management (“IRM”) and controls.
The Risk Management proposal is part of the Fed’s broader initiative to develop a supervisory rating system and related guidance that would align its consolidated supervisory framework for LFIs. Last August, the Fed issued for public comment two related proposals: a new rating system for LFIs (“proposed LFI rating system”) and guidance addressing supervisory expectations for board directors (“Board Expectations proposal”). (See previous InfoBytes coverage on the proposals.) The proposed LFI rating system is designed to evaluate LFIs on whether they possess sufficient financial and operational strength and resilience to maintain safe and sound operations through a range of conditions. With regard to the Board Expectations proposal, the January 4 proposal establishes supervisory expectations relevant to the assessment of a firm’s governance and controls, which consists of three chief components: (i) effectiveness of a firm’s board of directors, (ii) management of business lines, independent risk management and controls, and (iii) recovery planning. This guidance sets forth the Fed’s expectations for LFIs with respect to the second component—the management of business lines and IRM and controls, and builds on previous supervisory guidance. In general, the proposal “is intended to consolidate and clarify the [Fed’s] existing supervisory expectations regarding risk management.”
The January 4 release delineates the roles and responsibilities for individuals and functions related to risk management. Accordingly, it is organized in three parts: (i) core principals of effective senior management; (ii) core principals of the management of business lines; and (iii) core principles of IRM and controls.
Senior Management
The Risk Management proposal defines senior management as “the core group of individuals directly accountable to the board of directors for the sound and prudent day-to-day management of the firm.” Two key responsibilities of senior management are overseeing the activities of the firm’s business lines and the firm’s IRM and system of internal control. The proposed guidance highlights the principle that: Senior management is responsible for managing the day-to-day operations of the firm and ensuring safety and soundness and compliance with internal policies and procedures, laws and regulations, including those related to consumer protection.
Management of Business Lines
The proposal refers to “business line management” as the core group of individuals responsible for prudent day-to-day management of a business line and accountable to senior management for that responsibility. For LFIs that are not subject to supervision by the Large Institution Supervision Coordinating Committee (“LISCC”) these expectations would apply to any business line where a significant control disruption, failure, or loss event could result in a material loss of revenue, profit, or franchise value, or result in significant consumer harm.
A firm’s business line management should:
- Execute business line activities consistent with the firm’s strategy and risk tolerance.
- Identify, measure, and manage the risks associated with the business activities under a broad range of conditions, incorporating input from IRM.
- Provide a business line with the resources and infrastructure sufficient to manage the business line’s activities in a safe and sound manner, and in compliance with applicable laws and regulations, including those related to consumer protection, as well as policies, procedures, and limits.
- Ensure that the internal control system is effective for the business line operations.
- Be held accountable, with business line staff, for operating within established policies and guidelines, and acting in accordance with applicable laws, regulations, and supervisory guidance, including those related to consumer protection.
Independent Risk Management and Controls
The Risk Management proposal describes core principles of a firm’s independent risk management function, system of internal control, and internal audit function. The guidance does not prescribe in detail the governance structure for a firm’s IRM and controls. While the guidance does not dictate specifics regarding governance structure, it does set forth requirements with respect to the roles of the Chief Risk Officer and Chief Audit Executive:
- The CRO should establish and maintain IRM that is appropriate for the size, complexity, and risk profile of the firm.
- The Chief Audit Executive should have clear roles and responsibilities to establish and maintain an internal audit function that is appropriate for the size, complexity and risk profile of the firm.
The proposal requires that a firm’s IRM function be sufficient to provide an objective, critical assessment of risks and evaluates whether a firm remains aligned with its stated risk tolerance. Specifically, a firm’s IRM function should:
- Evaluate whether the firm’s risk tolerance appropriately captures the firm’s material risks and confirm that the risk tolerance is consistent with the capacity of the risk management framework.
- Establish enterprise-wide risk limits consistent with the firm’s risk tolerance and monitor adherence to such limits.
- Identify and measure the firm’s risks.
- Aggregate risks and provide an independent assessment of the firm’s risk profile.
- Provide the board and senior management with risk reports that accurately and concisely convey relevant, material risk data and assessments in a timely manner.
With regard to internal controls, the proposed guidance builds upon the expectations described in the Fed’s Supervisory Letter 12-17. A firm should have a system of internal control to guide practices, provide appropriate checks and balances, and confirm quality of operations. In particular, the guidance states that a firm should:
- Identify its system of internal control and demonstrate that it is commensurate with the firm’s size, scope of operations, activities, risk profile, strategy, and risk tolerance, and consistent with all applicable laws and regulations, including those related to consumer protection.
- Regularly evaluate and test the effectiveness of internal controls, and monitor functioning of controls so that deficiencies are identified and communicated in a timely manner.
With respect to internal audit, the proposed guidance does not expand upon the Fed’s expectations; rather it references existing supervisory expectations. The proposed guidance highlights that a firm should adhere to the underlying principle that its internal audit function should examine, evaluate, and perform independent assessments of the firm’s risk management and internal control systems and report findings to senior management and the firm’s audit committee.
Comments on the Fed’s proposed guidance are due by March 15.
OCC Updates Guidance on Federal Branch Supervision and Enforcement Action Policies and Procedures
On October 27, the OCC issued Bulletin 2017-46, updating guidance related to federal bank branch supervision and licensing. The OCC issued a revised version of its “Federal Branches and Agencies” booklet, which clarifies the process for reviewing and evaluating license conversion applications by a state-licensed branch or agency operated by a foreign bank to a federal branch or agency. Bulletin 2017-46 also replaced the 2014 agency paper entitled, The OCC’s Approach to Federal Branch and Agency Supervision. The paper outlines the OCC’s framework and considerations related to (i) the regulatory approach and supervision process for large and complex federal branches and agencies (not community banks), and (ii) the general overview of the filing requirements for applications, notices, and licenses, as well as the review and decision process.
On October 31, the OCC issued Bulletin 2017-48 to update its policies and procedures regarding bank enforcement actions. The updates are designed to provide more clarity and consistency in the implementation, communication and monitoring of enforcement actions. In particular, the updates are intended to, among other things, better describe the relationship between violations, concerns identified in matters requiring attention, and enforcement actions, emphasize communication with bank management and personnel and OCC supervisors, and enhance standard processes for tracking and resolving corrective actions. The updates are effective December 1, and are reflected in its “Bank Supervision Process,” “Community Bank Supervision,” “Federal Branches and Agencies Supervision,” and “Large Bank Supervision” booklets of the Comptroller’s Handbook.