InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Federal Reserve Board Responds to SCRA Compliance Questions
On March 29, the Federal Reserve Board published its quarterly Consumer Compliance Outlook, which includes the Board’s response to questions raised during a September 2012 interagency webinar on servicemember protection issues and SCRA compliance. Because that event had limited time for questions, the Board responded in writing to the most common questions received. The publication includes answers to questions related to (i) notification of active duty, (ii) maximum rate of interest on debts incurred prior to military service, (iii) foreclosure protection, (iv) the Homeownership Counseling Act, (v) permanent change of station orders, (vi) the Defense Manpower Data Center, and (vii) other miscellaneous issues.
Federal Reserve Board Approves Final Rule Related to Systemically Important Financial Institutions
On April 3, the Federal Reserve Board approved a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council when considering whether to designate a nonbank financial company as systemically important and subject to supervision by the Federal Reserve Board. Pursuant to the rule, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company's consolidated revenues or assets are derived from or related to activities that are defined as financial in nature under the Bank Holding Company Act. In addition, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities. The final rule largely mirrors the rule as proposed, but includes some changes. For example, final rule states that engaging in physically settled derivatives transactions generally will not be considered a financial activity. The final rule also defines the terms "significant nonbank financial company" and "significant bank holding company." The rule will become effective on May 6, 2013.
Federal Reserve Board and OCC Publish White Paper on CRE Concentration Guidance
On April 3, the Federal Reserve Board and the OCC jointly published a white paper on the regulators’ study of bank performance in the context of 2006 interagency guidance regarding commercial real estate lending that established supervisory criteria for banks that exceeded 100 percent of capital in construction lending and 300 percent of capital in total commercial real estate (CRE) lending. According to the paper, banks with high concentrations of construction and total commercial real estate lending that exceeded supervisory criteria failed at higher rates than banks with lower concentrations. Specifically key findings include: (i) 13 percent of banks that exceeded only the 100 percent construction criterion failed, (ii) among banks that exceeded both the construction and total CRE lending supervisory criteria, 23 percent failed during the three-year economic downturn from 2008 through 2011, compared with 0.5 percent of banks for which neither of the criteria was exceeded, (iii) construction lending was a key driver in many failures, and (iv) banks that were public stock companies and exceeded the supervisory criteria on CRE concentrations tended to experience greater deterioration in condition than banks below the criteria, and banks with CRE concentrations higher than the guidance criteria experienced larger declines in their market capital ratio during the recent economic downturn.
Federal Regulators Clarify Effective Dates for Flood Insurance Amendments
On March 29, the Federal Reserve Board, the FDIC, the OCC, the NCUA, and the Farm Credit Administration issued an interagency statement to clarify the effective dates for changes to the Flood Disaster Protection Act enacted last year in the Biggert-Water Flood Insurance Reform Act (the Act). The statement informs financial institutions that the force-placed aspects of the Act became effective upon enactment, which was July, 6, 2012, while provisions related to private flood insurance and escrow of flood insurance payments do not take effect until the agencies issue regulations. The statement reiterates the OCC’s prior statement that the new flood insurance penalty provisions in the Act took effect immediately and apply to violations that occurred on or after July 6, 2012.
CFPB Narrows Application of Credit Card Fee Limit
On March 28, the CFPB published a final rule to remove from Regulation Z a limitation on fees charged prior to credit card account opening. Effective immediately, the rule amends a restriction adopted by the Federal Reserve Board in April 2011, which expanded the 2009 Credit CARD Act fee limitation on certain fees charged during the first year after the account is opened to include fees charged prior to account opening. The CFPB rule eliminates the limitations on fees charged prior to account opening, and covers only those fees charged during the first year after account opening. The rule responds to a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the Federal Reserve Board’s broader application of the fee limit.
Democratic Lawmakers Push Regulators for Independent Foreclosure Review Details
On March 25, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to Federal Reserve Chairman Ben Bernanke and Comptroller of the Currency Thomas Curry challenging the regulators’ response to the lawmakers request for documents and information regarding the regulators’ decision to amend a group of April 2011 consent orders with mortgage servicers and cease the Independent Foreclosure Review originally required by those orders. The lawmakers detail the responses and state that the majority of their 14 requests went unanswered. The letter notes recent reports that the foreclosure reviews revealed wrongful foreclosures of military members and borrowers who ever missed a payment, and suggests the regulators are shielding the servicers’ “criminal activity.”
Federal Reserve Board Report Reviews Consumer Use of Mobile Financial Services
On March 27, the Federal Reserve Board presented the findings of a November 2012 online survey of consumers’ use of mobile technology to access financial services and make financial decisions. The report follows a related March 2012 Federal Reserve Board report, and includes the Board’s general findings that (i) mobile phones and mobile Internet access are in widespread use, (ii) the ubiquity of mobile phones is changing the way consumers access financial services, (iii) mobile phones are also changing the way consumers make payments, (iv) security and usefulness concerns continue to be the main impediments to the adoption of mobile financial services, (v) smartphones are changing the way people shop, and (vi) mobile phones are prevalent among unbanked and underbanked consumers. The report points out that the use of mobile phones to make payments at the point of sale has increased more rapidly than the use of mobile phones for banking, and that there is “substantial growth potential” for mobile payments as the ability to make them becomes more widespread.
Federal Reserve Board Announces BSA/AML Enforcement Action against Bank Holding Company
On March 26, the Federal Reserve Board released a recent enforcement action against a bank holding company related to deficiencies in certain of its bank subsidiaries’ Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs, as reflected in 2012 orders from the OCC and the FDIC requiring the subsidiary banks to remedy certain BSA/AML compliance deficiencies. Nearly a year later, the Federal Reserve Board order charges that the holding company lacked effective systems of governance and internal controls to adequately oversee the activities of the banks with respect to legal, compliance, and reputational risk related to the banks’ respective BSA/AML compliance programs. The order requires the holding company to (i) submit a plan to continue to improve the governance, structure, and operations of its BSA/AML and OFAC regulations compliance risk management program; and (ii) complete a review of the effectiveness of its firmwide BSA/AML compliance program and prepare a report. In addition, the company’s board must (i) submit a written plan to continue ongoing enhancements to its oversight of the company’s firmwide BSA/AML compliance risk management program; (ii) review the above-referenced BSA/AML compliance program report and submit a plan with specific actions the company will take to continue to strengthen the management and oversight of its firmwide compliance program; and (iii) submit quarterly progress reports. The Federal Reserve Board order does not include a civil money penalty.
Banking Agencies Update Leveraged Lending Guidance
On March 21, the Federal Reserve Board, the OCC, and the FDIC issued final interagency guidance to ensure institutions provide leverage lending in a safe and sound manner by: (i) identifying the institution's risk appetite for leveraged finance, establishing appropriate credit limits, and ensuring prudent oversight and approval processes; (ii) establishing underwriting standards that clearly define expectations for cash flow capacity, amortization, covenant protection, collateral controls, and the underlying business premise for each transaction, and consider whether the borrower’s capital structure is sustainable; (iii) concentrating valuation standards on the importance of sound methods in the determination and periodic revalidation of enterprise value; (iv) accurately measuring exposure on a timely basis, establish policies and procedures that address failed transactions and general market disruptions, and ensure periodic stress tests of exposures to loans not yet distributed to buyers; (v) developing information systems that accurately capture key obligor characteristics and aggregate them across business lines and legal entities on a timely basis, with periodic reporting to the institution’s board of directors; (vi) considering in risk rating standards the use of realistic repayment assumptions to determine a borrower’s ability to de-lever to a sustainable level within a reasonable period of time; (vii) establishing underwriting and monitoring standards similar to loans underwritten internally; and (viii) performing stress testing on leveraged loans held in portfolio as well as those planned for distribution. The new guidance took effect on March 22, 2013, and institutions have until May 21, 2013 to comply.
Banking Agencies Propose Revised CRA Guidance
On March 18, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the “Interagency Questions and Answers Regarding Community Reinvestment” (Q&As). Focused primarily on community development, the revised Q&As aim to (i) clarify how the agencies consider community development activities outside an institution’s assessment area, both in the broader statewide or regional area and in nationwide funds, (ii) clarify how to determine whether recipients of community services are low- or moderate-income; (iii) explain the consideration of certain community development services, (iv) address the treatment of qualified investments to organizations that use only a portion of the investment to support a community development purpose, and (v) clarify that community development lending should be evaluated in such a way that it may have a positive, neutral, or negative impact on the large institution lending test rating. In remarks to the National Community Reinvestment Coalition on March, 20, 2013, Comptroller Thomas Curry described the proposed changes and stressed that they are the first steps the agencies will take to address issues raised during a 2010 outreach effort to reappraise the CRA and identify gaps between CRA implementation and changes in the structure of the banking industry, and how customers access and use credit and financial products. Mr. Curry also promised training and revised examination procedures to ensure more consistent application of CRA rules. The agencies will accept comments on the revisions for 60 days following publication in the Federal Register.