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Senator Urges Federal Regulators to Sync QRM Rule with CFPB's QM Standard
On January 22, Senator Bob Corker (R-TN) sent a letter to federal regulators responsible for finalizing the Dodd-Frank Act mandated “qualified residential mortgage” (QRM) standard, urging that the final QRM definition mirror the “qualified mortgage” (QM) definition recently promulgated by the CFPB. The QRM rule will define those loans exempt from the Act’s risk retention requirements for mortgage securitizers, a requirement that also will be set by the rule though it cannot be less than the statutory floor of five percent of the credit risk for any asset that is not a QRM. The Act also prohibits the QRM standard from being broader than the QM definition. Senator Corker maintains that, because the QRM rule will exempt loans sold to federal government sponsored enterprises and government agencies, “if the QRM rule is written differently than the QM rule, most financial institutions will only originate loans intended for sale to” those entities and as a result the return of private capital to the secondary market will be limited.
Federal Regulators Announce Additional Monetary Settlements in Lieu of Independent Foreclosure Review
On January 16, the Federal Reserve Board announced that two additional mortgage servicers subject to consent orders issued in April 2011 agreed in principle to a monetary resolution of allegations that the firms engaged in improper mortgage servicing and foreclosure practices. As described, the agreements in principle mirror those obtained by the Federal Reserve Board and the OCC from 10 other servicers, which were announced last week. Together the two firms will provide $232 million in direct payments to more than 220,000 borrowers whose homes were in foreclosure during 2009 and 2010. The companies also will provide $325 million in other assistance, such as loan modifications and forgiveness of deficiency judgments. On January 18, the Federal Reserve Board and the OCC announced an agreement in principle with another servicer that will provide $96 million in direct payments to more than 112,000 borrowers, and $153 million in other assistance. Under all three agreements, borrowers will be contacted by the end of March about their exact payout, which could range from hundreds of dollars to $125,000, depending upon the type of alleged servicing error.
Federal Regulators Announce BSA/AML and Derivatives Trading Enforcement Actions Against Large Bank.
On January 14, the Federal Reserve Board and the OCC issued two consent orders against a large international bank and its trust company over alleged deficiencies in its Bank Secrecy Act and Anti-Money Laundering (BSA/AML) compliance programs. Under the Federal Reserve Board Order, the bank is required to conduct a full review of its compliance program and submit written reports to the Federal Reserve Bank of New York regarding the review’s findings and recommendations. Any proposed improvements are subject to approval by the Federal Reserve Bank of New York. The OCC Order identifies “critical deficiencies” in the bank’s BSA/AML compliance programs with respect to suspicious activity reporting, transaction monitoring, customer due diligence, and internal control implementation and requires specific corrective actions in response. Neither order requires a civil money penalty. On the same day, the Federal Reserve Board and the OCC issued consent orders concerning the bank’s derivatives trading activity. Under those orders, the bank must take corrective action as to its risk-management program, finance and internal audit functions, and Chief Investment Office, but the orders do not include a monetary settlement. The Federal Reserve Board stated that the corrective actions are necessary in light of disclosed, significant losses in a large synthetic credit portfolio managed by the Chief Investment Office. An OCC report found that the bank lacked adequate oversight to protect itself from such material risk, and had other inadequate risk management processes, trade valuation controls, and audit processes.
Federal Regulators Agree to Monetary Settlement With 10 Servicers In Lieu of Independent Foreclosure Review
On January 7, the OCC and the Federal Reserve Board announced that 10 of the 14 mortgage servicers subject to consent orders issued in April 2011 regarding alleged improper servicing and foreclosure practices agreed in principle to resolve those allegations by paying borrowers $3.3 billion directly and providing $5.2 billion in borrower assistance through loan modifications and forgiveness of deficiency judgments. For the settling servicers, the agreement ends the costly and ineffective Independent Foreclosure Review program required by the consent orders, pursuant to which the banks were to compensate borrowers for any financial injury and/or improper foreclosure identified by third-party consultants through a case-by-case loan file audit process or in response to borrower requests for review. The OCC states that more than 3.8 million borrowers are expected to receive compensation ranging from hundreds of dollars up to $125,000, without having to take any action to become eligible. The exact payout will depend on the type of alleged servicing error, and the regulators expect that borrowers will be contacted by the end of March with payment details. The regulators continue to seek similar agreements with the remaining companies subject to the 2011 consent orders.
Senators Ask Regulators to Halt Bank Payday Lending
On January 2, a group of Democratic Senators sent a letter to the Federal Reserve Board, the FDIC, and the OCC seeking action to stop banks from making payday loans. The letter cites the agencies’ “long history of appropriately prohibiting . . . banks from partnering with non-bank payday lenders,” but claims that several banks are currently making payday loans directly to their customers. The products at issue are actually deposit advance loans, which the Senators claim are structured the same as traditional payday loans and put customers in a cycle of debt. The Senators call on the regulators to take “meaningful regulatory action” in response to the problem as they present it, but stop short of identifying specific banks or outlining potential federal legislation.
Federal Reserve Board Updates Large Institution Supervision Framework
On December 17, the Federal Reserve Board (FRB) issued Supervisory Letter SR 12-17, which describes an updated framework for the consolidated supervision of large financial institutions in order to enhance the resilience of a firm, lower the probability of its failure, and reduce the impact on the financial system in the event of an institution’s failure. With regard to the former, the letter specifies the FRB’s expectations with regard to (i) capital and liquidity planning and position, (ii) corporate governance, (iii) recover planning, and (iv) management of core business lines. In support of its goal to reduce the impact of a failed firm, the letter describes the FRB’s expectations with regard to (i) management of critical operations, (ii) support of banking offices, (iii) resolution planning, and (iv) other macroprudential supervisory approaches. The letter also summarizes the FRB’s supervisory activities designed to assess each firm and support these goals. The framework applies to (i) Large Institution Supervision Coordinating Committee (LISCC) firms, (ii) domestic bank and savings and loan holding companies with consolidated assets of $50 billion or more that are not included in the LISCC portfolio, and (iii) foreign banking organizations with combined assets of U.S. operations of $50 billion or more that are not included in the LISCC portfolio.
Federal Reserve Board Proposes New Oversight of Foreign Banks
On December 14, the Federal Reserve Board (FRB) announced a proposal to strengthen its capabilities to oversee certain foreign banks that operate in the U.S. and move from the SEC to the Federal Reserve oversight of foreign bank broker-dealers. The proposal is aimed at fixing problems arising out of the financial crisis, specifically the way in which the SEC has regulated broker-dealer net capital over the past decade. Many blame the SEC’s 2004 decision to lower net capital requirements as exacerbating the economic downturn. Before the change, broker-dealers were permitted to maintain debt to equity ratios of approximately 12 to 1. After the SEC’s 2004 change, broker-dealers were permitted to dramatically reduce their net capital obligations resulting in debt to equity ratios of 30 or 40 to 1. The proposed rules generally apply to foreign banking organizations with a U.S. banking presence and total global consolidated assets of $50 billion or more and would subject certain U.S. operations of such firms to capital plan stress tests, single-counterparty credit limits, overall risk management, and early remediation. In addition, a foreign banking organization with both $50 billion or more in global consolidated assets and U.S. subsidiaries with $10 billion or more in total assets generally would be required to organize its U.S. subsidiaries under a single U.S. intermediate holding company (IHC) to allow for the consistent supervision and regulation of the U.S. operations of foreign banking organizations and help facilitate the resolution of failing U.S. operations of a foreign bank if needed. As proposed, the rules also would subject IHCs to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. Further, IHCs with $50 billion or more in consolidated assets would be subject to the capital plan rule. Finally, the U.S. operations of any foreign banking organization with combined U.S. assets of $50 billion or more would be subject to certain enhanced liquidity requirements. The FRB plans to give covered foreign firms until July 1, 2015 to comply. Comments on the proposal are due by March 31, 2013.
Federal Banking Regulators Release 2013 CRA Asset-Size Threshold Adjustments
On December 19, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly announced the adjusted thresholds for asset size used to define small and intermediate small banks and savings associations under the Community Reinvestment Act. Effective January 1, 2013, a small bank or savings association will mean an institution that, as of December 31 of either of the past two years, had assets of less than $1.186 billion. An intermediate small bank or savings association will mean an institution with assets of at least $296 million as of December 31 of both of the prior two years, and less than $1.186 billion as of December 31 of either of the prior two years.
U.S. Law Enforcement Authorities and Regulators Resolve Significant Money Laundering and Sanctions Investigations
On December 11, a major international bank holding company announced agreements with U.S. law enforcement authorities and federal bank regulators to end investigations into alleged inadequate compliance with anti-money laundering and sanctions laws by the holding company and its U.S. subsidiaries (collectively the banks). Under these agreements, the banks will make payments totaling $1.92 billion, will continue to cooperate fully with regulatory and law enforcement authorities, and will take further action to strengthen its compliance policies and procedures. As part of the resolution, the bank entered into a deferred prosecution agreement (DPA) with the DOJ pursuant to which the banks will forfeit $1.256 billion, $375 million of which satisfies a settlement with the Office of Foreign Assets Control (OFAC). The four-count criminal information filed in conjunction with the DPA charges that the banks violated the Bank Secrecy Act by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders. The DOJ also alleged that the banks violated the International Emergency Economic Powers Act and the Trading with the Enemy Act by illegally conducting transactions on behalf of customers in certain countries that were subject to sanctions enforced by OFAC. The banks agreed to pay a single $500 million civil penalty to satisfy separate assessments by the OCC and FinCEN related to the same alleged conduct, as well as a $165 million penalty to the Federal Reserve Board. The banks already have undertaken numerous voluntary remedial actions, including to (i) substantially increase AML compliance spending and staffing, (ii) revamp their Know Your Customer program, (iii) exit 109 correspondent relationships for risk reasons, and (iv) claw back bonuses for a number of senior officers. The banks also have undertaken a comprehensive overhaul of their structure, controls, and procedures, including to (i) simplify the control structure, (ii) create new compliance positions and elevate their roles, (iii) adopt a set of guidelines limiting business in those countries that pose a high financial crime risk, and (iv) implement a single global standard shaped by the highest or most effective anti-money laundering standards available in any location where the banks operates. Pursuant to the DPA, an independent monitor will evaluate the banks’ continued implementation of these and other enhanced compliance measures.
In a separate matter, on December 10, Manhattan District Attorney Cyrus R. Vance, Jr. and the DOJ announced the resolution of a joint investigation into a British bank’s alleged movement of more than $200 million through the U.S. financial system primarily on behalf of Iranian and Sudanese clients by removing information that would have revealed the payments as originating with a sanctioned country or entity, and thereby avoiding OFAC scrutiny. To resolve the matter, the bank was required to pay $227 million in penalties and forfeiture, and to enter into a DPA and corresponding Statement of Facts. Through the DPA, the bank admitted that it violated New York State law by falsifying the records of New York financial institutions and by submitting false statements to its state and federal regulators about its business conduct, and agreed to certain enhanced compliance practices and procedures. The payment also satisfies a settlement with OFAC over the same practices, while the Federal Reserve Board required an additional $100 million penalty to resolve its parallel investigation. The settlement follows an earlier settlement between this British bank and the New York Superintendent of Financial Services regarding the same alleged conduct.
House Financial Services Subcommittees Hold Joint Hearing on Impact of Basel III Proposals
On November 29, two Subcommittees of the House Financial Services Committee held a joint hearing regarding the federal banking agency proposals to implement the Basel III international regulatory capital accords. As with a Senate hearing on the same topic last week, committee members focused bipartisan attention on the proposals’ potential impact on community banks and insurance companies that are holders of depository institutions. The committee also explored the interplay between the Basel III proposals and the pending rules to set forth the “qualified mortgage” standard and the “qualified residential mortgage” standard. The regulators promised lawmakers that they would carefully consider the concerns of community bankers. The regulators did not provide a timeline for their final rulemaking.