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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.
Regulators, Lawmakers Scrutinize BSA/AML Compliance and Enforcement
On March 7, the Senate Banking Committee held a hearing entitled “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement,” which featured testimony from representatives of the Treasury Department, the Comptroller of the Currency; and the Federal Reserve Board. During the hearing, Senators challenged the regulators on what they view as insufficient civil and criminal enforcement of the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, and pressed them to act more aggressively in bringing criminal actions against banks. Senators also pressed lawmakers on comments made by Attorney General Holder at a hearing the day before where he expressed concern that some of the world’s biggest banks have become “too big to jail” because a potential punishment could negatively impact the broader economy. With regard to possible regulatory and legislative changes, Comptroller of the Currency Thomas Curry stated that the OCC is drafting guidance for banks on BSA/AML compliance, in part, to make it easier for the OCC to remove bank officers who violate federal anti-money laundering laws. Curry said the OCC also would support expanded safe harbors for banks submitting and sharing Suspicious Activity Reports. Comptroller Curry’s comments at the hearing follow remarks he made earlier in the week when he called on banks to devote more resources to BSA/AML compliance. Mr. Curry stressed that controls with regard to international activities – e.g., foreign correspondent banking and remote deposit capture – need to be commensurate with risk. He also directed banks to focus on third-party relationships and payment processors. Finally, the Comptroller cautioned banks to understand risks presented by deployment of new technologies and payment activities, including prepaid access cards, mobile banking, and mobile wallets.
Federal Reserve Board Releases Stress Test Results
On March 7, the Federal Reserve Board (FRB) released summary results of stress tests conducted for the 18 largest banks. This is the third round of stress tests conducted by the FRB, but the first conducted under new Dodd-Frank Act stress test requirements. According to the FRB, under the severe, nine-quarter hypothetical scenario, projected losses at the 18 bank holding companies would total $462 billion, and the aggregate tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014. The FRB assures that despite the large hypothetical declines, the aggregate post-stress capital ratio exceeds the actual aggregate tier 1 common ratio of approximately 5.6 percent prior to the government stress tests conducted in the midst of the financial crisis.
Federal Reserve Board and OCC Release Amended Foreclosure Consent Orders
On February 28, the Federal Reserve Board and the OCC jointly released amendments to their enforcement actions against multiple mortgage servicers to resolve allegations that the servicers engaged in improper mortgage servicing and foreclosure processing practices. The amendments resolve consent orders issued in April 2011 by memorializing several recent agreements in principle that provide for $3.6 billion in cash payments and $5.7 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments, to 4.2 million borrowers whose homes were in foreclosure in 2009 or 2010. For the participating servicers, the amendments also replace the requirements related to the Independent Foreclosure Review process set out under the original consent orders. The servicers are also required to undertake loss mitigation efforts focused on foreclosure prevention, and will continue to be monitored by examiners for implementation of corrective actions to address alleged deficient servicing and foreclosure practices.
Federal Reserve Board Extends Comment Period for Foreign Bank Rule
On February 22, the Federal Reserve Board, citing the “range and complexity of the issues addressed in the rulemaking,” as well as a “request from the public” for more time, extended the public comment period from March 31, 2013 until April 30, 2013 pertaining to its proposal to (i) enhance its oversight of certain foreign banks that operate in the U.S., and (ii) move from the SEC to the Federal Reserve oversight of foreign bank broker-dealers.
House Members Reiterate Small Bank Concerns over Basel III
On February 19, House Financial Services Committee members Shelley Moore Capito (R-WV) and Carolyn Maloney (D-NY) sent a letter to the Federal Reserve Board, the OCC, and the FDIC regarding the lawmakers’ concerns about the implementation of Basel III. Citing potential compliance costs and the potential derivative impact on consumers, Representatives Capito and Maloney ask that the agencies carefully tailor the Basel III capital requirements to ensure they are appropriate for community banks. The House and Senate have in recent months placed significant focus on the Basel III rulemakings, with both houses recently holding hearings on the issue and lawmakers previously sending letters to the regulators.
House Financial Services Ranking Member Seeks Additional Information Regarding Foreclosure Review Settlements
On February 15, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent an amended set of requests to the Federal Reserve Board and the OCC regarding the recent agreements in principle to end the Independent Foreclosure Review (IFR) established by consent orders issued in April 2011. Ms. Waters asks that, in advance of finalizing the terms of the agreements, the agencies produce by March 1, 2013: (i) policies and procedures about how loan files were to be reviewed by the IFR independent consultants, and any checklists used; (ii) calls or reports from the consultants to the agencies regarding error rates of reviewed files, or errors by analysts conducting the reviews; (iii) guidelines issued by the agencies to any consultant related to interpretation of the remediation framework; (iv) correspondence between the agencies and any consultant with regard to the servicing platform identified as “Loss Mitigation Notes,” and inconsistencies between the reported availability of borrower records provided by such a program and records entered into any other part of the servicing platform; and (v) any proposed plan for future reform or modification of servicing platforms or procedures generated or submitted by any consultant to the agencies. This request follows related requests made by Ms. Waters and other Democratic lawmakers seeking details pertaining to the settlement.
Democratic Lawmakers Seek Information Regarding Independent Foreclosure Review Settlements
On January 31, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD), House Oversight Committee Ranking Member, sent a letter to the Federal Reserve Board and the OCC seeking documents and information regarding the regulators’ decision to enter into settlements with certain mortgage servicers subject to consent orders issued in April 2011 to (i) resolve allegations that the firms engaged in improper mortgage servicing and foreclosure practices and (ii) end the Independent Foreclosure Review process established by the prior consent orders. The lawmakers are seeking (i) all documents regarding the performance of the independent consultants engaged by the servicers to conduct the foreclosure reviews, (ii) all documents created by the servicers or the consultants to update the regulators on the status of the foreclosure review process, (iii) all documents compiled by the regulators indicating the total amount of settlement funds paid to each consultant, (iv) the number of borrowers who requested review, by gender, race, zip code, and property value, (v) the total number of reviews initiated by each contractor, and (vi) the average time each contractor required to complete a review of a borrower’s file.
On the same day, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a separate letter requesting that the regulators ensure the final agreements entered in lieu of the foreclosure reviews include certain specific provisions, including (i) reordering of the matrix categories, (ii) requirements that principal reduction be provided as a form of indirect relief, and (iii) appointment of an independent monitor. Representative Waters also seeks information about payments to the consultants and how the regulators decided on the $8.5 billion settlement amount. Finally, a recent report noted that Representative Carolyn Maloney (D-NY) initiated her own inquiry into the settlements and payments to the consultants. According to the report, the letter may be used to support a request that the regulators claw back some of the payments made to the consultants.
D.C. Circuit Forces Banking Regulators to Revisit Order Barring Bank Director from Bank Activities
On January 29, the U.S. Court of Appeals for the D.C. Circuit held that the OCC and the Federal Reserve Board (FRB) improperly prohibited a bank director from participating in future banking activities of several institutions based on an agreement the director made to avoid state-level prosecution on perjury charges. DeNaples v. OCC, No. 12-1162, 2013 WL 322531 (D.C. Cir. Jan. 29, 2013). Under Section 19 of the Federal Deposit Insurance Act, banking regulators can prohibit an individual from participating in the affairs of an insured depository institution if the individual has been convicted of certain criminal offenses, or if the individual has entered into a “pretrial diversion or similar program” related to those criminal charges. In this case, the OCC and the FRB determined that a bank director could not participate in the affairs of several institutions with which he was affiliated because the director entered an agreement with state prosecutors by which the prosecutors withdrew perjury charges in exchange for certain actions taken by the bank director. The agencies determined the agreement constituted a “pretrial diversion or similar program.” When the bank director refused to halt his participation, the OCC and the FRB issued cease and desist orders requiring the director to terminate his relationship with the institutions. On appeal, the court held that the regulators applied an improper definition of “pretrial diversion or similar program” when they reasoned that the ordinary meaning of the phrase extends to any conditional agreement to withdraw charges. The court held that the definition must require more than any quid pro quo, and that the regulators should consider whether an agreement to avoid charges includes a voluntary agreement for treatment, rehabilitation, restitution or other noncriminal or nonpunitive alternatives. The court vacated the agencies’ orders and directed the agencies to determine on remand whether the conditions required by the state-level agreement fit within the parameters of a “pretrial diversion or similar program,” as established by the court.