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GAO Recommends Enhanced Oversight Of Independent Foreclosure Review Settlements
On April 29, the GAO published a report on its examination of the 2013 amended consent orders that ended the Independent Foreclosure Review process. After testing the regulators' major assumptions, the GAO concludes “that the final negotiated amount generally fell within a reasonable range.” However, the GAO criticizes the regulators for not defining specific objectives for the $6 billion in foreclosure prevention actions required by the settlements, for not analyzing available data, such as servicers' recent volume of foreclosure prevention actions, and for not analyzing approaches by which servicers' actions could be credited toward the total of $6 billion. In addition, the GAO found that while the OCC and the Federal Reserve are verifying servicers' foreclosure prevention policies, they are not testing policy implementation. The GAO believes that without specific procedures, regulators cannot assess implementation of the principles and may miss opportunities to protect borrowers. The GAO recommends that the OCC and the Federal Reserve Board “should define testing activities to oversee foreclosure prevention principles and include information on processes in public documents.” The GAO also believes the regulators should release publicly information on the processes used, such as how decisions about borrower payments were made, and that “[i]n the absence of information on the processes, regulators face risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process.”
U.S. House Approves Volcker CLO Fix
On April 29, the U.S. House of Representatives passed by voice vote HR 4167, a bill that would exclude certain debt securities of collateralized loan obligations (CLOs) from the so-called Volcker Rule’s prohibition against holding an ownership interest in a hedge fund or private equity fund. Section 619 of the Dodd-Frank Act—the Volcker Rule—generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. As implemented, that prohibition would cover CLOs, which banks and numerous lawmakers assert Congress never intended for the Volcker Rule to cover. Earlier in April, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions, which would extend until July 21, 2017, to conform their ownership interests in, and sponsorship of, covered CLOs. HR 4167 instead would provide a statutory solution by exempting CLOs issued before January 31, 2014 from divestiture before July 21, 2017.
Congressman Cummings Returns To Scrutiny Of Independent Foreclosure Reviews
On April 24, House Oversight Committee Ranking Member Elijah Cummings (D-MD) expressed renewed interest in the termination of the Independent Foreclosure Review (IFR). In a letter to Oversight Committee Chairman Darrell Issa (R-CA), Congressman Cummings requested a hearing on “the widespread foreclosure abuse and illegal activities engaged in by mortgage servicing companies” and to “examine why the [Fed] and the [OCC] appear to have prematurely ended the Independent Foreclosure Review” through revised consent orders issued in January 2013. The request is based on “new evidence” obtained by Congressman Cummings, including claims that outside consultants retained as part of the IFR “had identified very high error rates in several categories of review” at certain institutions just before the revised consent orders were announced. In addition to these concerns, Congressman Cummings raised questions about how regulators arrived at the compensation amounts servicers were required to pay under the settlements, and how regulators determined that the allegedly harmed borrowers would benefit more from the settlement than if the IFR had been completed. Last year, Congressman Cummings, together with Senator Elizabeth Warren (D-MA), raised similar concerns about the regulators’ decision to cease the IFR by entering into revised consent orders.
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 Board Announces Volcker CLO Conformance Period Extension
On April 7, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in, and sponsorship of, certain collateralized loan obligations (CLOs) covered by federal regulations implementing Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The Board previously adopted rules for the conformance period for covered funds—including CLOs—and at that time extended the conformance period for all activities and investments by one year, to July 21, 2015. But to ensure effective compliance, the Board plans to grant banking entities two additional one-year extensions, until July 21, 2017. These extensions only apply to CLOs that were in place as of December 31, 2013 and do not qualify for the exclusion in the final rule for loan securitizations. The Board’s decision was challenged during a House Financial Services Committee hearing the following day, in which several lawmakers argued that Congress never intended for the Volcker Rule to cover securitizations, including CLOs. The lawmakers urged the Federal Reserve to address the issue by amending the rule to exclude or grandfather in CLOs, rather than by extending the conformance period.
Prudential Regulators Finalize Leverage Ratio Rule For Largest Institutions
On April 8, the Federal Reserve Board, the FDIC, and the OCC adopted a final rule, effective January 1, 2018, requiring certain top-tier U.S. bank holding companies (BHCs) to maintain a minimum supplementary leverage ratio buffer of 2% above the minimum supplementary leverage ratio requirement of 3%. The final rule applies to BHCs with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (Covered BHCs), and to insured depository institution subsidiaries of those BHCs (Covered Subsidiaries). A Covered BHC that fails to maintain the supplemental leverage buffer would be subject to restrictions on capital distributions and discretionary bonus payments. Covered Subsidiaries must also maintain a supplementary leverage ratio of at least 6% to be considered “well capitalized” under the agencies’ prompt corrective action framework. The final rule is substantially similar to the rule the agencies proposed in July 2013. Concurrent with the final rule, the agencies also (i) proposed a rule that would modify the denominator calculation for the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee, which would apply to all internationally active banking organizations, including those subject to the enhanced supplementary leverage ratio final rule; and (ii) proposed a technical correction to the definition of “eligible guarantee” in the agencies’ risk-based capital rules. The agencies are accepting comments on both proposals through June 13, 2014. Separately, the FDIC Board adopted as final its Basel III interim final rule, which is substantively identical to the final rules adopted by the Federal Reserve Board and the OCC in July 2013.
D.C. Circuit Rejects Merchant Challenge To Higher Cap On Debit Card Transaction Fees
On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board's final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.
Federal Regulators Propose Framework for State Supervision of Appraisal Management Companies
On March 24, the Federal Reserve Board, the OCC, the FDIC, the CFPB, the FHFA, and the NCUA proposed a rule to implement the Dodd-Frank Act’s minimum requirements for registration and supervision of Appraisal Management Companies (AMCs). While current federal regulations mandate that appraisals conducted for federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), this rule would represent the first affirmative federal obligations relating to the registration, supervision, and conduct of AMCs.
Generally, the proposed rule would establish a framework for the registration and supervision of AMCs by individual states that choose to participate, and for state reporting to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). Although state participation is optional, AMCs would be prohibited from providing appraisal management services for federally related transactions in states that do not establish such a program.
Comments on the proposal will be due 60 days following publication in the Federal Register.
Scope of Proposal
The proposal defines an AMC as any person that (i) provides appraisal management services to creditors or secondary mortgage market participants; (ii) provides such services in connection with valuing a consumer’s principal dwelling as security for a consumer credit transaction (including consumer credit transactions incorporated into securitizations); and (iii) within a given year, oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more state-certified or state-licensed appraisers in two or more States. “Appraisal management services” include, among other things, recruiting, selecting, and retaining appraisers and contracting with state-certified or –licensed appraisers to perform appraisal assignments. Notably, the rule would apply to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling, whereas current federal regulations apply only to appraisals for transactions that involve an entity regulated by a federal financial regulatory agency and that require the services of an appraiser (federally related transactions).
The definition of AMC does not cover commercial real estate transactions or securitizations involving commercial real estate mortgages and would not apply to a department or division of an entity when such a department or division provides appraisal management services only to that entity. However, affiliate AMCs would be covered, even if they only provide services to their affiliated entity.
Minimum Requirements for State Supervision Programs
The rule would require participating states to implement, within 36 months after the final rule takes effect, a licensing program within a state agency that has authority to: (i) review and approve or deny an AMC’s application for initial registration; (ii) review and renew or refuse to renew an AMC’s registration periodically; (iii) examine the books and records of an AMC operating in the state and require the AMC to submit reports, information, and documents; (iv) verify that the appraisers on the AMC’s appraiser list, network, panel, or roster hold valid state certifications or licenses, as applicable; (v) conduct investigations of AMCs to assess potential violations of applicable appraisal-related laws, regulations, or orders; (vi) discipline, suspend, terminate, and refuse to renew the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders; and (vii) report an AMC’s violation of applicable appraisal-related laws, regulations, or orders, as well as disciplinary and enforcement actions and other relevant information about an AMC’s operations, to the ASC.
Requirements for AMCs
The rule would require an AMC to register with, and be subject to supervision by, a state appraiser certifying and licensing agency in each state in which the AMC operates. As proposed, an AMC that is a subsidiary owned and controlled by a federally regulated insured depository institution or an insured credit union would be exempt from state registration requirements.
In addition, an all AMCs would be required to (i) use only state-certified or state-licensed appraisers for federally related transactions; (ii) establish processes and controls reasonably designed to ensure that the AMC engages appraisers who have the requisite education, expertise, and experience necessary to complete competently the assignment for the particular market and property type; (iii) establish processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with TILA requirements relating to appraisal independence; and (iv) require appraisers to perform appraisal assignments in accordance with USPAP.
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.