InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Finalizes Rule to Supervise "Larger Participant" Consumer Reporting Agencies
On July 16, the CFPB finalized a rule that will allow it to begin supervising certain consumer reporting agencies (CRAs). Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services, (ii) private education loans, and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants.” Under this first “larger participant” rule, the CFPB will have supervisory authority over CRAs with more than $7 million in annual receipts from consumer reporting activities, effective September 30, 2012. The CFPB believes that the $7 million threshold will cover 30 companies that account for 94% of total industry receipts. The final rule is divided into two parts: (i) Subpart A sets the definitions and other terms applicable to the CFPB’s supervision of “larger participants” in general, and (ii) Subpart B identifies the market, terms, and “larger participant” test for the CRA industry. This latter part will be expanded for each new market the CFPB opts to supervise under its “larger participant” authority. While the rule as proposed also included a threshold for use in identifying “larger participants” in the debt collection market, the CFPB has postponed issuance of the final debt collection “larger participant” rule until the fall. The CFPB described the final rule as “the first in a series of rules to define larger participants of other markets.”
CFTC, SEC Approve Final Rules To Define "Swap"; CFTC Exempts Small Banks From Clearing Requirements
This week the CFTC and the SEC approved jointly written rules and guidance to further define “swap”, “security-based swap,” and other related terms for use in regulating over-the-counter (OTC) derivatives. The Dodd-Frank Act defines these terms but also requires both the SEC and CFTC to jointly define the terms further and jointly establish regulations regarding “mixed swaps” as may be necessary to carry out the purposes of swap and security-based swap regulation under the Act. The SEC and CFTC final rules and guidance identify specific products and services that do and do not fall within the further-defined terms. The approved rules will take effect 60 days after being published in the Federal Register. The approval of the definitions also triggers the period for swap dealers to comply with other Dodd-Frank Act rules put in place to regulate the OTC derivatives markets. The CFTC also approved a final rule that implements an exemption to the clearing requirement for non-financial entities and financial institutions with total assets of $10 billion or less that hedge or mitigate business risk through swaps.
CFPB Proposes Two Major Mortgage Rules
On July 9, the CFPB issued two proposed rules related to mortgages. The first proposed rule would amend Regulations X and Z to establish new disclosure requirements and forms for most residential mortgage transactions. The proposal would combine existing disclosure requirements in new loan estimate and closing forms and would incorporate new Dodd-Frank Act requirements. This proposed rule also provides extensive guidance regarding compliance with the new disclosure requirements. Comments on most aspects of the proposal are due by November 6, 2012, but the CFPB has requested comments by September 7, 2012 on two portions of the proposal. The second proposed rule would implement the Dodd-Frank Act’s amendments to HOEPA that (i) expand HOEPA’s coverage to more types of mortgage transactions, (ii) amend existing high-cost triggers, (iii) add a prepayment penalty trigger, and (iv) expand protections associated with high-cost mortgages. The proposal also would amend Regulation X to implement other homeownership counseling-related requirements in Dodd-Frank requiring lenders to (i) distribute a list of homeownership counselors or counseling organizations to consumers within a few days after applying for any mortgage loan and (ii) provide first-time borrowers with counseling before taking out a negatively amortizing loan. Comments on this second proposed rule are due by September 7, 2012.
CFPB Releases Report on Reverse Mortgages
On June 28, the CFPB released a report to Congress detailing the characteristics and evolving uses of reverse mortgages in today’s marketplace. The report presents findings from a CFPB study on reverse mortgages required by the Dodd-Frank Act. Among the findings, the CFPB report states that reverse mortgages are often difficult for consumers to understand. The report further observes that reverse mortgages are being used by younger borrowers to obtain all available equity upfront, a use that contravenes the original and intended use of reverse mortgage products and may pose substantial risks to consumers. Concurrent with the release of the report, the CFPB issued a Notice and Request for Information on topics related to reverse mortgages and will accept comments for 60 days following publication of the Notice in the Federal Register. The CFPB intends to use the information and comments received from the public, as well as the findings from its study, to determine whether further consumer education or regulatory action related to reverse mortgages is necessary.
FDIC Supplements Proposed Orderly Liquidation Authority Rule
On June 18, the FDIC published a Supplemental Notice of Proposed Rulemaking to amend the definition of “financial activities” included in a March 2011 Notice of Proposed Rulemaking regarding the Orderly Liquidation Authority (OLA). The March 2011 proposal sought to establish a comprehensive framework for the priority payment of creditors and procedures for filing and pursuing claims under the OLA created by the Dodd-Frank Act. Among other things, the proposal defined “financial companies” that may be subject to resolution under the OLA as those that are "predominantly engaged" in financial activities. To be "predominately engaged" in financial activities, the company must have derived at least 85 percent of its total consolidated revenue from financial activities over the two most recent fiscal years. In this supplemental notice, the FDIC delineates the categories of “financial activities” for purposes of the March 2011 proposal.
CFPB Seeks Additional Private Student Loan Complaints
On June 13, the CFPB issued a Notice of Request for Information seeking information on existing private student loan complaints collected by state agencies, institutions of higher education, consumer and legal advocates, and lenders. In addition to its general solicitation, the CFPB specifically invited the participation of state attorneys general, schools, and advocacy groups. The responses received by the CFPB will be incorporated into the student loan ombudsman’s report it provides to Congress pursuant to the Dodd-Frank Act. In conjunction with its general solicitation, the CFPB also published the nearly 2,000 comments it received in response to a Notice and Request for Information on private student loans that it issued on November 17, 2011. The CFPB identified the following common themes from the data collected to date in connection with its earlier solicitation: (i) many borrowers report relying on school financial aid offices for information and guidance on which loan products to use, (ii) many borrowers struggling in today’s economy are finding their private student loan debt to be unmanageable, and (iii) many borrowers report finding it difficult to navigate the repayment process.
Federal Bank Regulators Seek Comment on Three Proposed Regulatory Capital Rules, Finalize Market Risk Rule
On June 12, the Federal Reserve Board, the OCC, and the FDIC jointly issued three proposed rules, which would implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The first proposed rule would, among other things, (i) raise the minimum regulatory capital levels; (ii) introduce an additional common equity capital buffer; and (iii) adopt a stricter definition of capital. Taken together, these requirements would require banking organizations to increase the quality and quantity of their regulatory capital. The second proposed rule incorporates aspects of Basel II’s Standardized Approach to enhance the risk-sensitivity of a banking organization’s risk-weighted assets calculations. In addition, the second proposed rule sets forth alternatives that would replace the use of external credit ratings, a change required by Section 939A of the Dodd-Frank Act. The third proposed rule would apply to banking organizations that are currently subject to the advanced approaches rule or to the market risk rule, and for the first time, to savings and loan holding companies that meet the relevant size, foreign exposure, and trading activity thresholds. This rule seeks to enhance the risk-based capital rules’ sensitivity to trading risks and also would eliminate the use of external ratings as required by Section 939A of the Dodd-Frank Act. Comments on each of the proposed rules can be submitted through September 7, 2012.
Concurrent with the proposed rules, the federal regulators released a final rule regarding market risk. By amending the calculation of market risk, the final rule seeks to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions. The final rule incorporates comments received in response to a January 2011 proposed rule, as well as a December 2011 amended proposed rule, and applies to a banking organization with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more. According to the regulators, the most significant change from the proposals relates to the methods for determining the capital requirements for securitization positions. The final rule will impose greater capital requirements on the more subordinate tranches in a securitization because the final rule mechanism to calculate the capital charges on securitization exposures when the underlying pool of assets demonstrates credit weakness was altered to focus on delinquent exposures rather than on cumulative losses. This rule takes effect January 1, 2013.
OCC Finalizes Rule to Replace Certain Credit Rating References with Alternative Creditworthiness Standards.
On June 13, pursuant to Section 939A of the Dodd-Frank Act, the OCC published a final rule with regard to regulations applicable to investment securities, securities offerings, and foreign bank capital equivalency deposits. The final rule is identical to the rule proposed by the OCC in November 2011 and will require national banks to assess whether a security issuer has an "adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure," a standard which may be met if the risk of default by the issuer is low and timely repayment of principal and interest is expected. For federal savings associations, the definition of "investment grade" would cross-reference the requirement established by the FDIC. Simultaneously, the OCC finalized guidance to outline measures (i) banks should put in place to demonstrate they have properly verified their investments, and (ii) institutions should put in place to demonstrate their compliance with due diligence requirements when making investments and reviewing investment portfolios. Specific due diligence factors will depend on the type of security, and firms will need to adjust the depth of due diligence to match the credit quality of the security, its complexity, and the size of the investment.
CFPB Finalizes Multiple Rules Governing Enforcement Activities, Issues New Interim Rule
On June 6, the CFPB released final versions of three rules governing aspects of the CFPB’s enforcement activities and issued a new interim rule. The three rules set forth, respectively, the CFPB’s (i) authority and procedures for conducting investigations, (ii) practices for adjudication proceedings, and (iii) procedures through which state officials update the CFPB on state enforcement activities. While the rules have been in effect since July 2011 (in interim form), the final versions include some changes in response to public comments received. For example, the final investigations rule (i) specifies the CFPB staff members that have authority to initiate or close an investigation, (ii) adds to the CID process a conference between the parties within 10 calendar days of service, (iii) provides CID recipients a number of procedural options when additional time is needed to respond, and (iv) clarifies the rights of witnesses and which objections are appropriate for counsel to make during investigations. Additionally, the CFPB issued a new interim final rule to implement the Equal Access to Justice Act and will accept public comments for 60 days after publication in the Federal Register.
CFPB, Prudential Regulators Release Supervisory Coordination Memorandum
On June 4, the CFPB and the federal banking prudential regulators the Federal Reserve Board, the National Credit Union Administration, the Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency jointly released a Memorandum of Understanding (MOU) meant to facilitate coordination of supervisory activities. The Dodd-Frank Act grants the CFPB exclusive authority to examine insured depository institutions and insured credit unions with more than $10 billion of total assets (and their affiliates) for compliance with federal consumer financial laws. The prudential regulators retained supervisory authority for all other applicable laws for such institutions, and all supervisory responsibilities for institutions with $10 billion or less in total assets. The Dodd-Frank Act also requires the CFPB and the prudential regulators to share supervisory information and work to minimize regulatory burden by coordinating examinations. The recent MOU seeks to implement those statutory requirements by establishing guidelines for simultaneous examinations and a framework for sharing certain supervisory information. The MOU also sets forth, among other things, a process by which covered institutions can request separate examinations.