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Banking Regulators Clarify Volcker Rule Compliance Timeline, Senators Push for Final Rule
Recently, the Federal Reserve Board approved a statement clarifying that an entity covered by the Volcker Rule, section 619 of the Dodd-Frank Act, has until July 21, 2014 to comply unless the Board extends the conformance period. The clarified compliance date reflects the full two-year period provided by the statute for covered institutions to fully conform activities and investments. Generally, the Volcker Rule imposes certain prohibitions and requirements on banking entities and nonbank financial companies supervised by the Board that engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The Federal Reserve Board and other federal banking regulators continue their efforts to adopt regulations implementing the statutory restrictions. In October 2011, the Federal Reserve Board sought comment on a proposed rulemaking, as did the Commodities Futures Trading Commission in January 2012, but no final rules have emerged. On April 26, 22 Senators sent a letter to the regulators urging that they adopt a strong clear rule this summer.
CFPB Previews Mortgage Servicing Rules
On April 9, the CFPB previewed its upcoming mortgage servicing rules, which likely will be proposed this summer and finalized in January 2013. The key aspects of the proposal relate broadly to (i) monthly mortgage statements, (ii) ARM adjustment disclosures, (iii) force-placed insurance, (iv) payment crediting, (v) error resolution and borrower inquiries, and (vi) borrower outreach and borrower information. The majority of the details were provided in an outline prepared for a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel, which will consider the potential impact of the planned rules on small businesses. The outline includes model forms related to periodic statements, ARM reset notices, and force-placed insurance notices, which the CFPB has been testing in recent months. The CFPB release also included questions directed to the small entity representatives in order to assist the SBREFA panel in understanding the potential economic impacts of the particular proposals under consideration by the CFPB. Generally, the servicing proposals incorporate statutory changes imposed by the Dodd-Frank Act, which would go into effect in January 2013 unless final rules are issued on or before that date. The concepts in the proposal that do not address specific Dodd-Frank requirements are consistent with servicing requirements imposed by recent mortgage servicing consent orders and/or recent requirements for servicing delinquent loans owned by or serviced on behalf of Fannie Mae or Freddie Mac (see, e.g., Federal Reserve Board Consent Orders and Fannie Mae Ann. SVC 2011-08R).
CFPB Proposes Narrowing Application of Credit Card Fee Limit
On April 12, the CFPB published a proposed rule that would lift the current limit on credit card fees charged prior to account opening. Under the current rule, as adopted by the Federal Reserve Board (FRB) in April 2011, card issuers are limited to charging fees up to 25 percent of the credit limit in effect when the account is opened. The FRB rule applies this fee limit prior to account opening and during the first year after account opening. The CFPB proposal would limit the application of this fee restriction to only during the first year after account opening. This proposal addresses 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 FRBs broader application of the fee limit. The CFPB is accepting comments on the proposal through June 11, 2012.
Federal Reserve Offers Policy Guidance for REO Rental Programs
On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.
Federal Reserve Publishes Rules to Simplify Administration of Reserve Requirements
On April 12, the FRB published two final rules designed to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and the Federal Reserve Banks. The FRB amended Regulation D to (i) create a common two-week maintenance period, (ii) create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers, (iii) discontinue “as-of adjustments” related to deposit report revisions and replace all other such adjustments with direct compensation, and (iv) eliminate the contractual clearing balance program. These changes will be phased in, with the latter two taking effect on July 12, 2012, and the first two taking effect on January 24, 2013. A second rule amends Regulation J to make it consistent with the Regulation D amendments by eliminating references to “as-of adjustments.” The rule also clarifies the handling of checks sent to the Federal Reserve Banks and the application of funds transfer rules to remittance transfers. These changes will take effect on July 12, 2012. Finally, with these rule changes, the FRB also announced modifications to its overnight overdraft policy, which also will take effect on July 12, 2012.
FSOC Approves Final Rule to Designate Systemically Important Nonbanks
On April 3, the Financial Stability Oversight Council (FSOC) voted to approve a final rule and interpretive guidance regarding the process it intends to use in designating nonbank financial companies as systemically important and subject to supervision by the Federal Reserve Board (FRB). The final rule and guidance follow an advanced notice of proposed rulemaking, two proposed rules, and proposed guidance. The final designation process is substantially similar to that outlined in the second proposed rule, issued in October 2011, with some clarifications. For example, the final rule provides a longer time period (no less than 30 days) for companies to respond to a notice that it is being considered for a systemically important determination and makes clear that hearings conducted as part of the determination process are nonpublic. The FSOC also clarified in response to comments that it intends to interpret the term "company" broadly to include any corporation, limited liability corporation, partnership, business trust, association, or similar organization, but not unincorporated associations. The rule does not provide any industry-based exemptions and the FSOC indicated that it does not intend to provide any, but will consider related comments as part of the determination process. Regarding coordination, the FSOC declined to delay finalizing this rule until related regulatory activities are completed, for example, the FRB's rule for determining if a company is "predominantly engaged in financial activities," choosing to view those considerations as non-essential to its consideration of whether a nonbank financial company could pose a threat to U.S. financial stability.
FRB Reissues Proposal to Determine Significant Nonbanks
On April 2, the FRB released an amended proposed rule to establish requirements for determining whether a company is “predominantly engaged in financial activities.” The original proposal also defined the terms “significant nonbank financial company” and “significant bank holding company.” Comments received in response to the February 2011 proposed rule raised questions as to whether conditions imposed on the conduct of financial activities by the Bank Holding Company Act and the FRB’s implementing regulations should be considered in defining financial activities. In response, the FRB amended the proposal to clarify that any activity referenced in section 4(k) of the Bank Holding Act will be considered to be a financial activity without regard to conditions that were imposed on bank holding companies that do not define the activity itself. The revised proposal also adds an appendix that lists all activities that would be considered to be financial activities as of April 2, 2012. While the FSOC can designate nonbanks as systemically important, it can only do so with regard to nonbank financial companies that are predominantly engaged in financial activities which, under Section 102 of the Dodd-Frank Act, means that 85 percent or more of the company’s revenues or assets are related to financial activities, as defined in section 4(k) of the Bank Holding Act. The FRB is tasked with establishing the detailed criteria for determining whether a company meets this definition.
Federal Banking Regulators Propose Joint Revisions to Leveraged Finance Guidance
On March 26, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the interagency leveraged finance guidance issued in 2001. Leveraged finance transactions are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios. According to the agencies, the guidance needs to be revised given increasing leveraged lending volumes, deteriorating underwriting practices, limited protection of debt agreements, aggressive capital structures and repayment prospects, and less than satisfactory management information systems. Specifically, the agencies believe that the guidance should be updated to refocus attention on the following five key areas: (i) establishing a sound risk-management framework, (ii) underwriting standards, (iii) valuation standards, (iv) pipeline management, and (v) reporting and analytics. The agencies are accepting comments on the proposed guidance through June 8, 2012.
FRB Releases Results of Stress Tests on Large Bank Holding Companies
On March 12 and 13, the Federal Reserve Board (FRB) announced the methodology and results of stress tests it conducted on nineteen large U.S. bank holding companies as part of its 2012 Comprehensive Capital Analysis and Review (CCAR). Through the CCAR, the FRB is evaluating the capital planning processes and capital adequacy of the largest U.S. bank holding companies. One element of this evaluation is a supervisory stress test to evaluate whether firms would have sufficient capital to continue lending in a severely adverse economic environment. The CCAR stress test scenario assumes a severe recession in the U.S. with a peak unemployment rate of 13%, a 50% decrease in U.S. equity prices, and a 20% decline in U.S. house prices. The results, which are based on input from the holding companies, project (i) $534 billion of aggregate losses for the nineteen holding companies tested during the nine quarters of the scenario and (ii) that most of the holding companies will maintain regulatory capital ratios above regulatory minimum levels despite significant declines in capital ratios. The FRB emphasized that the results are not “expected or likely outcomes, but rather possible results under hypothetical, highly adverse conditions.” The FRB stated in its March 13 release that it would notify each bank holding company of any objections it has to the holding company’s current capital plan or planned capital distributions.
Federal Reserve Releases Additional Servicer Action Plans
On March 8, the Federal Reserve Board released action plans for three additional supervised financial institutions. The plans are designed to correct alleged deficiencies in mortgage servicing and foreclosure procedures. The release also included an additional engagement letter between one financial institution and a third-party foreclosure review firm retained by the financial institution to review foreclosures that were in process in 2009 and 2010. The action plans and engagement letters are required by formal enforcement actions issued by the Federal Reserve last year. The Federal Reserve first released a group of action plans and engagement letters on February 27, 2012.