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Fed Fines New York Bank $3 Million for Violating Regulatory Risk Capital Requirements
On June 26, the Federal Reserve fined a New York-based bank $3 million for unsafe and unsound banking practices after the firm allegedly assigned a lower risk weighting to a portfolio of assets in violation of then-applicable Basel I regulatory risk capital requirements. According to the consent order, between 2010 and 2014, the bank consolidated a portfolio of collateralized loan obligations onto its balance sheet. It allegedly assigned a zero-risk weighting to the assets improperly, and therefore overstated its risk-based capital ratios and set aside less capital than it should have.
Pennsylvania-Based Bank Settles Overdraft Class Action for $1M
On June 12, a Pennsylvania-based bank resolved a class action lawsuit over claims the bank charged its customers improper overdraft fees by agreeing to a proposed $975,000 settlement. According to plaintiff’s unopposed motion for approval of the settlement, the bank had a “practice of assessing overdraft fees even when a customer has sufficient funds in their account to cover all merchant requests for payment.” The plaintiff further alleged that the bank incorrectly charged the fees “to maximize its overdraft fee revenue.” Transactions triggering an overdraft fee using the available balance, but which would not trigger an overdraft fee using the ledger balance, are included in the settlement. The proceeds of the proposed settlement will be distributed to eligible class members within 20 days of the effective date of the settlement.
A preliminary issue in this case was the bank’s belief that the suit was subject to arbitration. The bank claimed the dispute was governed by an agreement to arbitrate contained in plaintiff’s 2008 account agreement, and not, as plaintiff contended, by plaintiff’s 2010 account agreement, which did not contain an arbitration agreement. The trial court disagreed with the bank. In fact, the Pennsylvania Superior Court affirmed the trial court’s decision that there was no agreement to arbitrate the action, after which the Pennsylvania Supreme Court denied the bank’s petition to appeal that decision.
FDIC Chairman Discusses Efforts to Reach Out to Unbanked Communities
On May 23, at the Bank On 2017 National Conference in Washington, DC., Chairman of the FDIC, Martin J. Gruenberg, discussed his agency’s efforts to reach out to unbanked communities. In his prepared remarks, “Connecting Unbanked Communities to Mainstream Financial Services: The Vital Role of Bank On Coalitions,” Gruenberg shared results from an FDIC survey of unbanked and underbanked households and spoke about initiatives the agency has developed to help increase access to the banking system by unbanked and underbanked households. (See previous InfoBytes coverage on the report.) “Economic inclusion goes to the heart of the FDIC’s mission of maintaining the public’s confidence in the banking system,” Gruenberg stated. “By working together to promote access to safe accounts and integrate financial services into important local initiatives, we expand opportunities for people to save, invest, meet basic financial goals, and more fully participate in our economy.”
Findings cited in the report, which provide measurements on access to and use of the traditional banking system at the national and state level, include the following: (i) seven percent of households were unbanked, without any account relationship at an insured institution; (ii) 19.9 percent of households were underbanked, defined as households in which a member had a bank account, but nevertheless used alternative financial services providers to address needs such as check cashing or payday loans; and (iii) use of online and mobile banking to access accounts increased substantially from 2013 to 2015. 36.9 percent of respondents reported online banking as their primary method for accessing a bank account, compared to 28.2 percent relying on bank tellers. After examining the results of the survey, Gruenberg emphasized the need to expand economic inclusion to reach unbanked consumers and provide awareness of available safe banking services. Gruenberg noted that “a key area of focus has been creating access to low-cost, safe transaction accounts.” Gruenberg praised the expansion of the FDIC Safe Account project, which “enrolled consumers in electronic transaction accounts that relied on debit cards, without a check-writing feature, to provide access to funds.” Additionally, he cited the recently updated National Account Standards for the Cities for Financial Empowerment Fund. The FDIC provides technical assistance to economic inclusion partnerships and coalitions—which includes banks, community groups, state and local officials, and others—with the goal of expanding opportunities to fully participate “in the mainstream banking system.” Finally, Gruenberg stated that survey results show that underserved consumers believe mobile technology has the potential to “enhance the level of control, convenience, and affordability” associated with banking relationships. Therefore, he suggested that offering explicit strategies to support those who would enroll in mobile financial services could be beneficial.
FDIC Releases Third and Fourth Quarter CRA Examination Schedule
On May 31, the FDIC issued its Third Quarter Community Reinvestment Act (CRA) Examination Schedule for the following regions: New York, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. Additionally, the Agency released the CRA Examination Schedule for the Fourth Quarter in the following regions: New York, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. In an effort to be “more responsive and transparent to the public” as well as to provide more time for review and comment, going forward, the FDIC will release the upcoming examination schedule for two quarters rather than one. The institutions listed on the schedules were chosen for CRA examinations based on the FDIC’s criteria which states that, absent reasonable cause, for institutions with $250 million or less in assets, those with a CRA rating of “Satisfactory” would be examined no more than once every 48 months, and those institutions with a CRA rating of “Outstanding” would be examined no more than once every 60 months. Public comments on the institutions to be examined under the CRA are encouraged and will be considered if received prior to the completion of the examination.
OCC Announces March 2017 Enforcement Actions
On April 20, the Office of the Comptroller of the Currency (OCC) released a list of enforcement actions taken against national banks, federal savings associations, and former institution-affiliated parties in March. The actions include orders for civil money penalties (CMPs), restitution, and prohibition. Among the actions, a California bank was fined $58,000 for violations of the Flood Disaster Protection Act, as well as the former Chairman, CEO, and President of a Wisconsin bank was banned from banking and ordered to pay a CMP of $100,000 and $1.6 million in restitution due to breaches of fiduciary duty and unsafe or unsound practices involving bank-paid personal expenses and excessive compensation.
FDIC Releases Second Quarter CRA Examination Schedule
On February 28, the FDIC issued its Second Quarter Community Reinvestment Act (CRA) Examination Schedule for the following regions: New York, Atlanta, Chicago, Kansas City, Dallas and San Francisco. The entities listed on the schedules were chosen for CRA examinations based on the FDIC’s criteria which states that, absent reasonable cause, for institutions with $250 million or less in assets, those with a CRA rating of “Satisfactory” would be examined no more than once every 48 months, and those institutions with a CRA rating of “Outstanding” would be examined no more than once every 60 months. Public comments on the institutions to be examined under the CRA are encouraged and will be considered if received prior to the completion of the examination.
D.C. Circuit: Investors Can’t Challenge Agreement Distributing Fannie/Freddie Net Worth to Treasury
On February 21, the U.S. Court of Appeals for the District of Columbia Circuit held that stockholders of Fannie Mae and Freddie Mac (the Companies) could not challenge dividend-allocating terms that FHFA negotiated on behalf of the Companies because the Housing and Economic Recovery Act (HERA) strictly limits judicial review of actions authorized thereunder. Perry Capital LLC v. Mnuchin, No. 14-5243, 2017 WL 677589 (D.C. Cir. Feb. 21, 2017).
In 2008, Fannie and Freddie were placed into conservatorship with FHFA, which then entered into a stock purchase agreement with Treasury to obtain emergency capital for Fannie and Freddie. In exchange, Treasury received preferred shares of stock from Fannie and Freddie that provided for a quarterly dividend of 10 percent of the total funds drawn from Treasury. After Fannie and Freddie began routinely borrowing from Treasury to pay the dividends, FHFA and Treasury amended the stock purchase agreement in 2012 so that repayment would be based on the Companies’ profits rather than mandatory dividends. The stockholder-plaintiffs in this action sought to challenge the 2012 amendment–in particular, arguing that the 2012 amendment exceeded the authority granted to FHFA under HERA and constituted “arbitrary and capricious conduct” in violation of the Administrative Procedure Act. One class of stockholders also argued that the amendment constituted a breach of fiduciary duty and certain terms and covenants of the Companies’ stock certificates. The district court had dismissed both complaints on the motions of FHFA and Treasury.
The D.C. Circuit opinion noted that Section 4617(f) of HERA expressly states that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” The court interpreted this language to prohibit any court from “wielding [its] equitable relief to second-guess either the dividend-allocating terms . . . or FHFA’s business judgment.” And although an exception to this bar on judicial review has been recognized where an agency is found to have exceeded or violated its statutory powers or functions, the court determined that FHFA’s actions were within its statutory powers or functions.
Although the majority of the stockholders’ claims were rejected, the stockholders’ contract-based claims regarding liquidation preferences and dividend rights were remanded to the district court for further proceedings.
National Bank Terminates Four Senior Managers in Response to Sales Practices Scandal
On February 21, a national bank fined by the CFPB last September for opening deposit and credit card accounts without customers’ knowledge announced the termination of four current or former senior managers in its Community Banking Department. The individuals will not receive 2016 bonuses and will forfeit unvested equity rewards and vested outstanding options. As previously covered in InfoBytes, the bank’s incentive compensation program encouraged employees to “engage[] in Improper Sales Practices to satisfy goals and earn financial rewards”—practices that the CFPB alleged were unfair and abusive. The bank eliminated all product sales goals in retail banking effective January 1 of this year, and is conducting its own independent investigation, which is ongoing.
Fed's Regulatory Chief Submits Letter of Resignation; Will Step Down in April
On February 10, the Fed announced that Daniel K. Tarullo submitted his resignation as a member of the Board of Governors of the Federal Reserve System, effective on or around April 5. Mr. Tarullo—who has been a member of the Board since January 28, 2009—was appointed to the Board by President Obama for an unexpired term ending January 31, 2022. During his time on the Board, he served as Chairman of the Board’s Committee on Supervision and Regulation. He was also Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation.
NCUA Publishes Proposed Rule Offering Alternate Capital Proposal for Credit Unions
On February 8, the National Credit Union Administration (NCUA) published a notice of proposed rulemaking to expand the types of investment capital that federally insured credit unions could use to meet certain regulatory requirements. NCUA is considering whether to allow credit unions to use investment capital (that would be uninsured capital subordinate to all other claims) to satisfy the risk-based net worth ratio requirement. Currently, only low-income designated credit unions are allowed to use secondary capital to satisfy two regulatory requirements: the net worth ratio and the risk-based net-worth ratio. Although any changes to the definition of net worth would require an act of Congress, the NCUA asserted in the proposal that it has broad authority to adjust the risk-based net worth ratio requirement and therefore may choose to allow credit unions that are not “low-income designated” to use alternative capital to meet this requirement.