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FDIC Advises Banks On Managing Interest Rate Risk
On October 8, the FDIC issued Financial Institution Letter FIL-46-2013, which re-emphasizes the importance of prudent interest rate risk oversight and risk management processes to prepare for a period of rising interest rates. The FDIC states that interest rate risk management should be viewed as an ongoing process that requires effective measurement and monitoring, clear communication of modeling results, conformance with policy limits, and appropriate steps to mitigate risk. It believes that for a number of FDIC-supervised institutions, the potential exists for material securities depreciation relative to capital in a rising interest rate environment. FDIC examiners will continue to consider the amount of unrealized losses in the investment portfolio and the degree to which institutions are exposed to the risk of realizing losses from depreciated securities when qualitatively assessing capital adequacy and liquidity and assigning examination ratings.
FDIC Cautions Financial Institutions About D&O Insurance Coverage
On October 10, the FDIC released Financial Institution Letter FIL-47-2013 to caution financial institutions about an increase in exclusionary terms or provisions in director and officer (D&O) liability insurance policies purchased by financial institutions. The FDIC reports that insurers are increasingly adding exclusionary language to D&O policies that has the potential to limit coverage and leave officers and directors personally responsible for claims not covered by those policies. Such exclusions may adversely affect financial institutions’ ability to recruit and retain qualified directors and officers. The FDIC advises institutions to thoroughly review the risks associated with coverage exclusions contained in D&O policies. The letter also reminds institutions that FDIC regulations prohibit an insured depository institution or depository institution holding company from purchasing insurance that would be used to pay or reimburse an institution-affiliated party for the cost of any civil money penalties assessed in an administrative proceeding or civil action commenced by any federal banking agency.
Justice Department Announces Three Fair Lending Actions
Recently, the DOJ released information regarding three fair lending actions, all three of which included allegations related to wholesale lending programs. On September 27, the DOJ announced separate actions—one against a Wisconsin bank and the other against a nationwide wholesale lender—in which the DOJ alleged that the lenders engaged in a pattern or practice of discrimination on the basis of race and national origin in their wholesale mortgage businesses. The DOJ charged that, during 2007 and 2008, the bank violated the Fair Housing Act and ECOA by granting its mortgage brokers discretion to vary their fees and thus alter the loan price based on factors other than a borrower’s objective credit-related factors, which allegedly resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The bank denies the allegations but entered a consent order pursuant to which it will pay $687,000 to wholesale mortgage borrowers who were subject to the alleged discrimination. The allegations originated from an FDIC referral to the DOJ.
The DOJ charged the California-based wholesale lender with violations of the Fair Housing Act and ECOA, alleging that over a four-year period, the lender’s practice of granting its mortgage brokers discretion to set the amount of broker fees charged to individual borrowers, unrelated to an applicant’s credit risk characteristics, resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The lender did not admit the allegations, but agreed to enter a consent order to avoid litigation. Pursuant to that order the lender will pay $3 million to allegedly harmed borrowers. The order also requires the lender to take other actions including establishing race- and national origin-neutral standards for the assessment of broker fees and monitoring its wholesale mortgage loans for potential disparities based on race and national origin.
Finally, on September 30, the DOJ announced that a national bank agreed to resolve certain legacy fair lending claims against a thrift it acquired several years ago, which the bank and the OCC identified as part of the acquisition review. Based on its own investigation following the OCC referral, the DOJ alleged that, between 2006 and 2009, the thrift allowed employees in its retail lending operation to vary interest rates and fees, and allowed third-party brokers as part of its wholesale lending program to do the same, allegedly resulting in disparities between the rates, fees, and costs paid by non-white borrowers compared to similarly-situated white borrowers. The bank, which was not itself subject to the DOJ’s allegations, agreed to pay $2.85 million to approximately 3,100 allegedly harmed borrowers to resolve the legacy claims and avoid litigation.
FDIC Explains Supervisory Approach to Payment Processing Relationships
On September 27, the FDIC issued Financial Institution Letter FIL-43-2013, which is intended to clarify the FDIC’s policy and supervisory approach related to financial institutions that facilitate payment processing services—directly or through a third party—for merchant customers engaged in “higher-risk activities.” The letter states that banks that perform these services for merchants engaged in activities that “tend to display a higher incidence of consumer fraud or potentially illegal activities” are expected to perform proper risk assessments, conduct due diligence to determine the merchants are operating in accordance with applicable law, and maintain systems to monitor the relationships with payment processors and merchants. Institutions that properly manage payment processing relationships and risks are not prohibited or discouraged from providing such services to businesses operating in compliance with applicable law. The FDIC intends to assess whether institutions are adequately overseeing these activities and addressing related risks. The FDIC’s statement follows concerns raised by certain banks, their representatives in Congress, and third-party payment processors about the scope of the governmental scrutiny of online lenders, payment processors, and their relationships with banks.
Federal Agencies Issue Guidance On Reporting Elder Financial Abuse Under Gramm-Leach-Bliley
On September 23, eight federal agencies, including the Federal Reserve Board, the CFPB, the OCC, and the FDIC, issued interagency guidance to clarify the applicability of Gramm-Leach Bliley Act privacy provisions to reporting suspected financial exploitation of older adults. The guidance states that although the Act generally prohibits a financial institution from disclosing nonpublic personal information about a consumer to any nonaffiliated third party without notifying the consumer and providing an opportunity to opt-out of the disclosure, the Act contains several exemptions that generally allow for the reporting of suspected elder financial abuse, either at the request of a local, state, or federal agency or on the financial institution’s own initiative.
FDIC Promises Guidance on Bank Payment Processing
On September 17, FDIC Chairman Martin Gruenberg responded to a letter sent recently by Republican members of the House of Representatives, in which the members objected to the agency’s approach toward online lending and the banks that process payments on behalf of online lenders. In his response letter, Chairman Gruenberg explains the FDIC’s approach to the issue, describes the challenges for banks who do business with online lenders and third party payment processors, and promises “ a Financial Institution Letter . . . to make it clear that the FDIC's focus is the proper management of the banks' relationships with their customers, particularly those engaged in higher risk activities, and not underlying activities that are permissible under state and federal law.”
Report Indicates Record Pace for FDIC Suits Against Directors and Officers
On September 16, an economic and financial analysis and consulting firm issued a report that indicates the FDIC already has filed more suits against bank directors and officers in 2013 than it has in any year since the start of the financial crisis. The report states that through August 2013, the FDIC has seized 20 institutions and filed at least 32 lawsuits against officers and directors. Notably, the report finds that the pace of filings in the second and third quarters of 2013 has exceeded the rate of new filings in any equivalent period in the past three years. Over that three year period, the FDIC has filed a total of 76 suits against the directors and officers of failed institutions, 10 of which have settled, and one of which resulted in a jury verdict.
FDIC Finalizes Depositor Preference Rule
On September 10, the FDIC approved a final rule to clarify that deposits in foreign branches of U.S. banks are not insured. The impetus for the rule was the U.K. Prudential Regulation Authority’s (PRA) (formerly the Financial Services Authority) proposal to prohibit banks from non-European Economic Area countries from operating deposit-taking branches in the U.K. unless U.K. depositors in such branches would be on an equal footing in the national depositor preference regime with home-country (uninsured) depositors if a bank were to fail and require a resolution. The FDIC believes that U.S. banks seeking to comply with the PRA proposal likely will change their U.K. deposit agreements so that the deposits are payable both in the U.K. and in the U.S. The FDIC rule is intended to protect the Deposit Insurance Fund against the potential resulting liability that the FDIC could face as a deposit insurer for customers of foreign branches of U.S.-based insured depository institutions. While deposits at foreign branches of U.S. banks will not be insured, they can be treated as deposits for purposes of national depositor preference laws. The rule will not affect deposits in overseas military banking facilities governed by regulations of the Department of Defense. The rule takes effect 30 days from publication in the Federal Register.
Federal Regulators Release Tailored Resolution Plan Template
On September 3, the Federal Reserve Board and the FDIC released an optional model template for firms to use when preparing the tailored resolution plans required from some bank and nonbank entities under Dodd-Frank. Entities impacted by these requirements include (i) bank holding companies with total consolidated assets of $50 billion or more and (ii) nonbank financial companies designated for enhanced prudential supervision by the Financial Stability Oversight Counsel.
Federal Regulators Issue Fourth Quarter CRA Examination Schedules
On August 30, the OCC and FDIC published schedules of Community Reinvestment Act (CRA) examinations to be conducted in the fourth quarter of 2013.