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Republican House Members Object To DOJ Online Lender Probe
Last week, a group of 31 Republican House Members reportedly submitted a letter to the DOJ and FDIC accusing the agencies of “intimidating some community banks and third party payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online lenders.” According to reports, the letter argues that the government’s actions effectively cut off access to lawful, short-term, high-interest loans available online. Several prominent online lenders have reportedly ceased their lending operations in response to similar pressure from state regulators.
FDIC to Consider QRM Proposal Next Week
This week, the FDIC released the agenda for an August 28, 2013 Board Meeting at which the Board will consider the re-proposal of a rule to implement the credit risk retention requirements of the Dodd-Frank Act, including provisions regarding “qualified residential mortgages” or QRMs. The FDIC and other federal banking and housing agencies originally proposed a rule in April 2011 that would have required sponsors of asset-backed securities (ABS) to retain at least five percent of the credit risk of the assets underlying the securities. Exemptions to the proposed rule included U.S. government-guaranteed ABS and mortgage-backed securities that are collateralized exclusively by residential mortgages that qualify as QRMs. The proposed rule would have established a definition of QRMs incorporating criteria designed to ensure that such QRMs were of very high credit quality, including a 20% down payment requirement or a requirement that the borrower’s debt-to-income ratio not exceed 36%. It recently has been reported that, in response to overwhelming objections from industry participants, the re-proposed rule will loosen those standards and align the QRM definition with the CFPB’s qualified mortgage or QM definition.
Prudential Regulators Propose Leverage Ratio Rule
On August 20, the Federal Reserve Board, the OCC, and the FDIC proposed a rule to strengthen the leverage ratio standards for the largest U.S. banking organizations. The proposed rule is the same as that approved last month by the FDIC and the OCC. The rule would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due by October 21, 2013.
Federal Government, Illinois AG Team Up to Bring First TARP Criminal Charges
On August 6, the Special Inspector General for the Troubled Asset Relief Program (TARP), the FDIC Office of Inspector General, and Illinois Attorney General Lisa Madigan announced criminal charges against former members of the board of directors and senior executives at a bank that received funds under the TARP program. The authorities allege that the former directors and officers concealed the bank’s financial condition from state regulators, while the board chairman allegedly solicited and demanded bribes in exchange for business loans and lines of credit. The authorities charge that over a six year period, the officers submitted numerous fraudulent reports to their Illinois regulator and used money from third parties to make payments on several bank loans that were pasts due. During this period, the bank applied for and obtained TARP funds that were used to further the officers’ criminal scheme.
FDIC Provides Technical Assistance on Interest Rate Risk for Community Banks
On August 6, the FDIC released a technical assistance video intended to provide community bank management teams with information about regulatory issues and proposed regulatory changes related to interest rate risk. The FDIC plans to release five additional videos over the next five months that will cover fair lending, appraisals and evaluations, troubled debt restructurings and the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance coverage.
Prudential Regulators Propose Stress Test Guidance for Mid-Size Institutions
On July 30, the OCC, the FDIC, and the Federal Reserve Board proposed guidance for stress tests conducted by institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act mandated regulations adopted by the regulators last October, such firms are required to conduct annual company-run stress tests starting in October 2013. The guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also underscores the importance of stress testing as an ongoing risk management practice that supports a company’s forward-looking assessment of its risks and better equips the company to address a range of macroeconomic and financial outcomes. Comments on the proposed guidance are due by September 25, 2013.
Prudential Regulators Encourage Private Student Loan Workouts
On July 25, the FDIC, the OCC, and the Federal Reserve Board issued a joint statement to encourage financial institutions to “work constructively with private student loan borrowers experiencing financial difficulties.” The statement explains that prudent workout arrangements are consistent with safe-and-sound lending practices and are generally in the long-term best interest of both the financial institution and the borrower. Specifically, under the Retail Credit Policy, which covers student loans, “extensions, deferrals, renewals, and rewrites of closed-end loans can be used to help borrowers overcome temporary financial difficulties.” As such, the agencies promise not to criticize institutions for engaging in prudent workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in adverse credit classifications or troubled debt restructurings in accordance with accounting requirements under GAAP. Further, the regulators state that modification programs should provide borrowers with clear and easily accessible practical information about the available options, general eligibility criteria, and the process for requesting a modification.
Prudential Regulators Finalize Regulatory Capital Rule, Propose New Leverage Ratio for Large Banks
On July 9, the FDIC and the OCC approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The same rule was approved on July 2 by the Federal Reserve Board. The final rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1 capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. The rule also establishes a minimum leverage ratio of 4% for all banking organizations. In response to concerns raised by smaller and community banking organizations, the regulators did not finalize more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages, as explained in more detail in our recent post. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations, but does extend the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements. Also on July 9, the FDIC and the OCC approved a proposed rule that would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due 60 days after it is published in the Federal Register.
FDIC Announces Senior Personnel Changes
On June 17, the FDIC announced that Arthur J. Murton will replace James Wigand, Director of the Office of Complex Financial Institutions, who plans to retire. Mr. Murton most recently served as the Director of the Division of Insurance and Research where he has been responsible for, among other things, leading the agency's efforts in assessing economic and financial sector risks to the banking industry, developing and overseeing risk-based deposit insurance pricing and overall insurance fund management, and overseeing the collection and publication of bank financial information. Diane Ellis will serve as the new Director of the Division of Insurance and Research, where she currently serves as Deputy Director for Financial Risk Management and Research.
FDIC Announces Agreement with Canadian Counterpart on Cross-Border Bank Resolution
On June 12, the FDIC announced the signing of a memorandum of understanding (MOU) with the Canada Deposit Insurance Corporation to formalize existing efforts between the two regulators to cooperate on effective resolution planning in the event of the failure of large, complex financial institutions that maintain operations in both countries. The MOU provides a framework for the parties to consult and share resources and information when addressing a bank resolution, and contemplates future coordination on related policy issues.