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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.
Senate Banking Committee Seeks Perspectives of Midsized, Regional, and Large Institutions, Regulators on Economic Growth
On June 15, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Fostering Economic Growth: Midsized, Regional and Large Institution Perspective”. This is the third in a series of hearings to address economic growth. Frequent topics of discussion in the hearing included stress testing and capital planning—specifically the Federal Reserve’s Comprehensive Capital Analysis and Review stress test. Also discussed was the Systemically Important Financial Institution designation and costs incurred as a result, as well as the Volcker Rule.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that the current regulatory framework is “insufficiently tailored for many of the firms subject to it.”
Sen. Sherrod Brown (D-Ohio) – ranking member of the Committee—released an opening statement in which he stated “Let me be clear: proposals to weaken oversight of the biggest banks have no place in this committee’s process. . . Having said that, I am optimistic that there is room for agreement on a modified regime for overseeing regional banks.”
The June 15 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Mr. Harris Simmons, Chief Executive Officer and Chairman of Zions Bancorporation, on behalf of the Regional Bank Coalition (prepared statement)
- Mr. Greg Baer, President of The Clearing House Association (prepared statement)
- Mr. Robert Hill, Chief Executive Officer of South State Corporation, on behalf of the Midsize Bank Coalition of America (prepared statement)
- Ms. Saule Omarova, Professor of Law at Cornell University Law School (prepared statement)
On June 22, the Senate Banking Committee held another hearing entitled “Fostering Economic Growth: Regulator Perspective, the fourth in its series of hearings focusing on economic growth. The hearing is available via webcast here.
Federal Reserve Chair Comments on CCAR and Stress Test Transparency
On June 16, Federal Reserve (Fed) Chair Janet Yellen sent a letter to Rep. Blaine Luetkemeyer (R-Mo.) underscoring the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. The Fed, Yellen asserts, will continue to published CCAR instructions in advance of the submission date for capital plans. Yellen further committed to releasing instructions and scenarios for the stress tests by February 15. The guidance will offer banks more details about the qualitative and quantitative components of the exam. However, Yellen warned that disclosing all the details of the Fed's modeling on the annual exams “would give banks an incentive to adjust their business practices in ways that change the results of the stress test without changing the risks faced by the firms . . . [resulting in] less effective stress tests that present a misleading picture of the actual vulnerabilities faced by firms. There would also be a risk of increased correlations in asset holdings among large banks, making the financial system more vulnerable to adverse economic shocks.” However, Yellen said the Fed is weighing different approaches to provide banks with more information about the agency's modeling.
Fed Assesses $1.8 Million Civil Money Penalty Against Florida-Based Holding Company, Terminates Enforcement Action
On June 8, the Board of Governors of the Federal Reserve (Board) announced the termination of an enforcement action brought against a Florida-based holding company in April 2011 relating to deficiencies in its residential mortgage loan servicing, loss mitigation, and foreclosure processing activities found in an Office of Thrift Supervision (OTS) review of the company. Additionally, the OTS review found inadequate procedures to assess potential risks associated with such activities. Under the terms of the 2011 enforcement action, the holding company was required to enhance its oversight of its thrift subsidiary and improve its internal risk management, audit, and compliance programs to address deficiencies in these areas. The decision to terminate the action was based on a review conducted by the Board’s supervisory team, which determined the holding company made “sustainable improvement” in its mortgage servicing oversight practices. Furthermore, the mortgage servicer has agreed to pay a $1.8 million civil money penalty.
OCC, Fed Supervisory Guidance on Model Risk Management Followed by FDIC
On June 7, the FDIC issued Financial Institution Letter FIL-22-2017 announcing that, in order to provide consistency across institutions and agencies, it is adopting the 2011 model risk management supervisory guidance that was issued by the Federal Reserve (SR 11-7 ) and the OCC (OCC Bulletin 2011-12) thereby making the guidance applicable to certain FDIC-supervised institutions, namely those with $1 billion or more in total assets. The FDIC guidance defines the term “model” as “a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates.” The FDIC indicated that banks’ heavy reliance on models in financial decision-making can come with costs, especially when the decisions are “based on models that are incorrect or misused.”
According to the FIL, the guidance contains “technical conforming changes” that make it relevant to institutions that are regulated by the FDIC, such as a “revised definition of 'banks' to reflect the FDIC's supervisory authority.”
Among other things, the FIL highlights that an effective model risk management framework should include the following:
- “disciplined and knowledgeable development that is well documented and conceptually sound”;
- “controls to ensure proper implementation”;
- “processes to ensure correct and appropriate use”;
- “effective validation processes”; and
- “strong governance, policies, and controls.”
For institutions with assets totaling less than $1 billion, the guidance will only apply in certain circumstances, such as when “the institution's model use is significant, complex, or poses elevated risk to the institution.”
Senators Introduce Bill to Provide Relief to Community Banks
On May 26, Senators Orrin Hatch (R-Utah), Angus King (I-Me.), and Bill Nelson (D-Fla.) introduced bipartisan legislation intended to provide regulatory relief to small financial intuitions. According to a press release issued by Sen. Hatch’s office, the Community Bank Relief Act (S. 1284) would increase the asset threshold from $1 billion to $5 billion, thereby expanding the number of institutions covered by the Small Bank Holding Company Policy Statement (Statement). Based on FDIC data, raising the asset threshold would affect 443 bank holding companies (BHC) and other financial institutions. Additionally, 96 percent of BHCs and savings and loan holding companies would be covered by the Statement compared to 87 percent as of December 31, 2016, according to the Federal Reserve (Fed). The legislators believe the bill will improve the Dodd-Frank Act “without compromising safety standards” and help “small financial institutions provide households and small businesses more quality-based loans” that will advance economic growth. Notably, the Fed will still be able to exclude any BHC or savings and loan company if it determines the action is warranted.
OCC, Federal Reserve Issue Flood Insurance Violations; Reauthorization of National Flood Insurance Program Discussions Continue
During the month of May, the OCC and the Board of Governors of the Federal Reserve (Board) took action against certain banks for violations of the Flood Disaster Protection Act (FDPA) and National Flood Insurance Act (NFIA). Concurrently, House Financial Services Subcommittee Republicans circulated a package of draft legislation to reform and reauthorize the National Flood Insurance Program (NFIP), which expires at the end of September.
OCC Action. On May 19, as part of its monthly listing of enforcement actions taken against national banks, federal savings associations, and former institution-affiliated parties, the OCC announced that it had fined a Texas-based federal savings association $87,500 in April for violations of the FDPA. According to the consent order, the bank allegedly failed to “ensure the timely notification and force-placement of the requisite amounts of flood insurance on property securing loans in a special flood hazard area in which flood insurance is available under the NFIA.”
Federal Reserve Action. On May 25, the Board announced an enforcement action against a Georgia-based bank for violations of the NFIA. Although the consent order fines the bank $1.5 million, it does not specify how many violations there were or what they related to. However, the maximum civil money penalty under that law is $2,000 per violation. The NFIA has a number of requirements for banks, which include ensuring that a borrower has adequate flood insurance before originating a loan for a property in a special flood hazard area and providing notice to the borrower in a reasonable time before closing that they are required to have flood insurance.
National Flood Insurance Program Discussion. As previously covered in InfoBytes, several committees—including the Senate Committee on Banking, Housing, and Urban Affairs and the House Financial Services Committee—are discussing the reauthorization of the NFIP. On May 25, Rep. Sean Duffy (R-Wis.), Chairman of the House Financial Services Subcommittee, issued a series of reauthorization discussion drafts and summaries. The six bills (see below) included in the package would (i) reauthorize the NFIP for five years; (ii) limit annual premium increases; (iii) authorize states to voluntary create flood insurance affordability programs; (iv) eliminate the mandatory purchase requirement for commercial properties; (v) establish a private market for flood insurance; (vi) reform the flood zone mapping process to increase accuracy and fairness in mapping; (vii) require covered flood prone areas to develop plans to mitigate flood risks if they have repeated structure losses; and (viii) address fraud in the claims process.
- National Flood Insurance Program Policyholder Protection and Information Act of 2017—Discussion Draft and Summary;
- Private Flood Insurance Market Development Act of 2017—Discussion Draft and Summary;
- National Flood Insurance Program Mapping Fairness Act of 2017—Discussion Draft and Summary;
- Flood Risk Mitigation Act of 2017—Discussion Draft and Summary;
- National Flood Insurance Program Integrity Improvement Act of 2017—Discussion Draft and Summary; and
- National Flood Insurance Program Administrative Reform Act of 2017—Discussion Draft and Summary.
Duffy noted, “We’re releasing this discussion draft so that all sides can continue to provide input into protecting the program integrity of the NFIP.” He added, “The ideas stemming from this open process will ensure that everyone who needs flood insurance will have access to it while ensuring that the NFIP does not fall further into debt.”
Big Bank Agrees to $41 Million Fine by Federal Reserve Over Lax AML Controls
On May 26, the Board of Governors of the Federal Reserve (Board) and a multinational bank agreed on a settlement over allegations of anti-money laundering (AML) and Bank Secrecy Act (BSA) violations. The settlement, which only relates to the bank’s U.S. operations, includes a $41 million fine and a cease and desist order. The agreement was reached after the most recent Board examination of the bank’s AML program identified “significant deficiencies” in the bank’s transaction monitoring capabilities as well as its risk management and compliance with BSA/AML requirements. According to the Board, among other things, the resulting regulatory compliance deficiencies prevented the bank from properly assessing potentially suspicious transactions between 2001 and 2015. Under the settlement, the bank must provide written plans to the Board within 60 days, which include the methodology and target date for enhancement of their transaction monitoring system. Within the same 60 days, the bank also must submit a strategy to “strengthen its oversight of anti-money laundering compliance across its U.S. operations.”
Federal Reserve Announces Updates to Regulation CC Regarding Electronic Checks
On May 31, the Board of Governors of the Federal Reserve System (Board) announced final amendments to the check collection and return provisions in Regulation CC, Availability of Funds and Collection of Checks, which implements the Expedited Funds Availability Act of 1987, the Check Clearing for the 21st Century Act of 2003 and the official staff commentary of the regulation. The amendments update Regulation CC “to reflect the evolution of the nation's check collection system from one that is largely paper-based to one that is virtually all electronic.” The Board (i) retained the current same-day settlement rule for paper checks; (ii) applied Regulation CC’s existing check warranties to check that are collected electronically; and (iii) adopted new warranties and indemnities related to checks collected and returned electronically and to electronically-created items.
In addition to the final rule, the Board also requested comments on proposed language amending Regulation CC's existing liability provisions to include a presumption that a substitute or electronic check was altered instead of forged in the event of a dispute under federal or state law in the absence of evidence such as the original check. Comments on the proposed amendments are requested within 60 days of publication in the Federal Register.
Financial Agencies Issue Advisory Addressing Appraiser Availability
On May 31, the FDIC, the Board of Governors of the Federal Reserve, the OCC, and the NCUA issued FIL-19-2017 to discuss two possible methods for addressing appraiser shortages: (i) temporary practice permits and (ii) temporary waivers. The resulting Interagency Advisory addresses concerns raised pursuant to the Economic Growth and Regulatory Paperwork Reduction Act process regarding the shortage of certified and licensed appraisers, particularly in rural areas. The advisory states that “[t]emporary practice permits could allow state certified or licensed appraisers to provide their services in states where they are not certified or licensed, including those experiencing a shortage of appraisers.” The advisory further states that temporary waivers may also be granted thus improving the timeliness of appraisals in those areas. The advisory applies to all FDIC-supervised institutions.