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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.
FinCEN, Federal Reserve Board Propose Changes to Certain Bank Secrecy Act Definitions
On November 29, FinCEN and the Federal Reserve Board announced that they are seeking comments on a proposed rule to amend the definitions of "funds transfer" and "transmittal of funds" set forth in the regulations implementing the Bank Secrecy Act. The proposed rule explains that the changes are designed to ensure that the current scope of the definitions is not expanded, following recent related amendments to the Electronic Fund Transfer Act. Comments on the proposed rule are due by January 25, 2013.
Federal Banking Regulators Issue Statement on Conversions of Troubled Banks
On November 26, the Federal Reserve Board, the FDIC, and the OCC, together with the CSBS, issued guidance on implementation of section 612 of the Dodd-Frank Act, which imposes restrictions on conversions of national banks and federal savings associations to state-chartered institutions and vice versa. As the Interagency Statement describes, section 612 generally prohibits such charter conversions while an institution is subject to either a formal enforcement order issued by its primary regulator involving a significant supervisory matter or to a memorandum of understanding entered into with its primary regulator involving a significant supervisory matter. The Statement (i) explains that federal and state agencies consider the prohibition to cover all formal enforcement actions by a federal or state agency, (ii) encourages institutions subject to the prohibition that are seeking conversion under one of the several exceptions to notify regulators prior to submitting a conversion application, and (iii) outlines the processes by which federal and state agencies will comply with the notification and information sharing requirements of section 612.
CFPB and Federal Reserve Board Increase Thresholds for Exempt Consumer Credit and Lease Transactions
On November 20, the CFPB and the Federal Reserve Board announced that, effective January 1, 2013, dollar thresholds in Regulation Z (TILA) and Regulation M (Consumer Leasing Act) for exempt consumer credit and lease transactions will increase to reflect the annual percentage increase in the consumer price index as of June 1, 2012. Transactions at or below the thresholds are subject to the protections of the regulations. Based on the adjustments, the TILA and Consumer Leasing Act protections generally will apply to consumer credit transactions and consumer leases of $53,000 or less in 2013. Mortgage transactions and private student loans remain subject to TILA regardless of the amount of the loan. While the CFPB has rulemaking authority under TILA and the Consumer Leasing Act, the Federal Reserve Board retains authority to issue rules for certain motor vehicle dealers. In addition to the joint adjustment, the CFPB separately adjusted the dollar amount that triggers additional protections for certain home mortgages under the Home Ownership and Equity Protection Act (HOEPA). Consistent with the increase in the consumer price index, the 2013 dollar amount of the HOEPA fee trigger will be $625.
Federal Reserve Board Governor Calls for New Approach to Mortgage Regulation, Highlights Potential Impacts of Qualified Mortgage Rule
On November 9, in a speech to the Community Bankers Symposium, Federal Reserve Board Governor Elizabeth Duke reviewed in detail the role community banks play in the mortgage market and the post-Dodd-Frank Act mortgage lending challenges facing community banks. Ms. Duke explained that new rules to implement the Basel III capital accords, as well as those to put in place by Dodd-Frank Act requirements regarding escrow accounts for higher-priced mortgages, loan officer compensation, and appraisal requirements will burden community banks significantly. Ms. Duke highlighted the pending qualified mortgage and qualified residential mortgage rules, noting that they could have a “profound effect on the mortgage terms offered and the underwriting conditions.” not only for community banks, but for all banks. Specifically, she said that these rules could “constrain community bankers from using their experience with the cash flows from a small business customer or their knowledge of local real estate markets to customize a loan for an ‘irregular’ situation, such loans may not be made.”. Given the “cost of regulation that is prescriptive with respect to underwriting, loan structure, and operating procedures” and the “lack of evidence that balance sheet lending by community banks created significant problems,” relating to the financial crisis, Ms. Duke concluded that policymakers should establish a separate, simpler regulatory structure applicable to community bank mortgage lending.
Federal Reserve Board and OCC Renew Efforts to Market Independent Foreclosure Reviews
On November 13, the Federal Reserve Board and the OCC announced renewed efforts to remind eligible borrowers to participate in the Independent Foreclosure Review Program by December 31, 2012. Under the program, an eligible borrower can have his or her foreclosure reviewed for free by independent consultants to determine whether the borrower was financially injured due to errors, misrepresentations, or other deficiencies in the foreclosure process. An injured borrower may be eligible for compensation or other remedies. The program originally was scheduled to close April 30, 2012, but has been extended numerous times over the past year. The renewed marketing effort includes targeted print, radio, and online advertising, as well as direct coordinated outreach by community, housing, and faith-based groups.
Federal Banking Regulators Issue Supplemental Statement Regarding Borrower and Institution Relief Following Hurricane Sandy
On November 14, the Federal Reserve Board, the OCC, the National Credit Union Administration, and the FDIC supplemented a prior statement on the impact of Hurricane Sandy on customers and the operations of financial institutions. The supplemental guidance identifies activities that could be considered “reasonable and prudent” steps to assist affected customers, including, for example (i) waiving certain fees and penalties, including ATM and overdraft fees, (ii) easing credit limits and terms for new loans, and (iii) offering payment accommodations. The regulators also provide post-storm guidance regarding loan modifications, the Community Reinvestment Act, and customer identification. The guidance largely mirrors guidance issued by the FDIC on November 9, 2012 in Financial Institution Letter FIL-47-2012.
Banking Regulators Provide Guidance on Basel III Implementation Timeline, Congress Offers Additional Responses to Basel III Proposals
On November 9, the Federal Reserve Board, the OCC, and the FDIC announced that proposed rules to implement the Basel III regulatory capital accords will not take effect on January 1, 2013. The agencies cite the large volume of comments received in response to the proposed rules as the reason for the delay. Recently, members of three states’ congressional delegations joined others in submitting letters to the federal banking regulators in response to the proposed Basel III regulations. The letters all raise concerns about the potential disproportionate impact of the proposed rules on smaller, community and regional institutions, and challenge the attempt by regulators to apply international accords to all U.S. institutions regardless of size. Members of the Texas delegation focused on provisions that would require all unrealized gains and losses on available-for-sale securities to flow through to common Tier-1 equity, which the lawmakers believe will require community banks to divert capital resources from customer services and bank growth. Indiana Members added concerns about the effect of proposed excessive risk weighting and restrictions on dividends and discretionary bonuses, while Members from South Carolina echoed general concerns about the impact of the proposals on community banks. These legislators join other federal and state policymakers who have submitted similar comments in recent weeks. Scrutiny of the proposals will continue next week with a Senate Banking Committee hearing planned for November 14, 2012 to review the pending rules with representatives from the Federal Reserve Board, the OCC, and the FDIC.