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FDIC Files MBS Suits On Behalf of Failed Bank
On August 10, the FDIC filed five actions that collectively seek to recover over $740 million from numerous financial institutions based on claims that the institutions violated federal and state securities laws in the offering of certain residential mortgage-backed securities to a now failed bank. As receiver for the failed bank, the FDIC alleges that the institutions omitted key facts and made numerous false statements of material fact about the securities, including about the credit quality of the mortgage loans that backed the securities. The material misstatements and omissions, according to the FDIC, contributed to substantial losses at the failed bank and subsequent costs to the Federal Deposit Insurance Fund. The suits, which were filed in the U.S. District Courts for the Central District of California (Case No. 12-06911) and the Southern District of New York (Case No. 12-6166), as well as the Circuit Court for Montgomery County, Alabama (Case Nos. 03-CV-2012-901035.00,03-CV-2012-901036.00,03-CV-2012-901037.00), are similar to others filed by the FDIC, the NCUA, and the FHFA.
FDIC Settles Student Debit Card Fee Enforcement Action; CFPB Issues Related Consumer Advisory
On August 8, the FDIC announced consent orders with a debit card issuer and vendor to resolve allegations that the entities operated an allegedly unfair and deceptive student debit card account program that (i) charged student account holders multiple nonsufficient fund (NSF) fees from a single transaction, (ii) allowed accounts to remain in overdrawn status while NSF fees accrued, and (iii) collected fees from subsequent deposits to the accounts. Collectively the settling companies will provide $11 million in restitution and agreed to pay civil money penalties totaling $282,000. The orders also require that the companies enhance their compliance programs and take specific steps to alter their NSF practices. On August 9, the CFPB issued a consumer advisory in which it reminds students that they (i) cannot be required to use a specific bank or card, (ii) should select bank account before arriving at school, and (iii) should opt for direct deposit as soon as it is offered.
Banking Regulators Extend Comment Period for Three Proposed Capital Rules
On August 8, the Federal Reserve Board, the FDIC, and the OCC announced an extension of the comment period for three proposed regulatory capital rules. The proposed rules were announced in June with a comment period closing September 7, 2012. The regulators are now giving interested parties until October 22, 2012 to submit comments.
FDIC Finalizes Rule and Guidance Regarding Assessment of Risk Capital Requirements
On July 24, the FDIC published a final rule that prohibits any insured savings association from acquiring or retaining a corporate debt security unless the association first determines that the issuer has adequate capacity to meet its obligations through the projected life of the security. An issuer would satisfy this requirement if it presents a low risk of default and is likely to make a full and timely repayment of principal and interest. The final rule is largely identical to the rule as proposed, but makes one change to clarify the rule and harmonize it with parallel OCC regulations. In conjunction with the final rule, the FDIC also finalized guidance meant to assist savings associations in conducting due diligence to determine whether a security is eligible under the final rule. The finalized guidance is substantially similar to the proposed version. The final rule took effect July 21, 2012.
FDIC Reveals Banks' Living Wills
On July 3, the Federal Deposit Insurance Corporation (FDIC) posted the public sections of the initial resolution plans submitted by sixteen large bank holding companies. The resolution plans were required by the Dodd-Frank Act. The documents are meant to act as living wills that spell out how the banks could wind themselves down in the event of their failure. Generally, the public portions of these plans contain an outline of the banks organization, assets and capital ratios, and describe in high-level detail the mechanisms that each would employ to wind up its operations in the event of failure. The plans are subject to revisions following review by the FDIC and the Federal Reserve.
SEC and FDIC Announce Senior Appointments
On July 3, the SEC announced that Ken C. Joseph will lead the Investment Adviser/Investment Company Examination Program for the New York Regional Office. Mr. Joseph previously served for 16 years as a Staff Attorney, Branch Chief, and Assistant Director in the SEC’s Division of Enforcement in Washington, DC and New York.
On July 2, the FDIC announced that Doreen R. Eberley will oversee all examination activities of the FDIC’s regional and field supervisory operations as Senior Deputy Director for Supervisory Examinations in the Division of Risk Management Supervision. Ms. Eberley currently serves as New York Regional Director and has been with the FDIC for 25 years. The FDIC also announced that Andrew Gray will serve as Deputy to the Chairman for Communications and Eric Spitler will serve as Director of the Office of Legislative Affairs.
Federal Agencies Announce New Mortgage-Related Policies to Support Military Homeowners
On June 21, the CFPB, the federal prudential banking regulators, and the FHFA announced new policies to support servicemember homeowners. The CFPB, the Federal Reserve Board, the FDIC, the NCUA, and the OCC issued joint guidance that identifies specific servicing practices deemed by regulators to present risks to servicemembers. For servicemember homeowners who have received Permanent Change of Station Orders, the guidance instructs servicers to maintain adequate policies and procedures disallowing the identified practices. The guidance also informs servicers that if an agency determines that a servicer has engaged in any acts or practices that are unfair, deceptive, or abusive, or that otherwise violate federal consumer financial laws, the agency will take appropriate supervisory and enforcement actions. Concurrent with the regulators’ announcement, the FHFA announced that military homeowners with Permanent Change of Station Orders and with Fannie Mae or Freddie Mac loans will be eligible to sell their homes in a short sale even if they are current on their mortgage. Under the new policy, Fannie Mae and Freddie Mac will not pursue a deficiency judgment or any cash contribution or promissory note from covered servicemembers for any property purchased on or before June 30, 2012.
FDIC Supplements Proposed Orderly Liquidation Authority Rule
On June 18, the FDIC published a Supplemental Notice of Proposed Rulemaking to amend the definition of “financial activities” included in a March 2011 Notice of Proposed Rulemaking regarding the Orderly Liquidation Authority (OLA). The March 2011 proposal sought to establish a comprehensive framework for the priority payment of creditors and procedures for filing and pursuing claims under the OLA created by the Dodd-Frank Act. Among other things, the proposal defined “financial companies” that may be subject to resolution under the OLA as those that are "predominantly engaged" in financial activities. To be "predominately engaged" in financial activities, the company must have derived at least 85 percent of its total consolidated revenue from financial activities over the two most recent fiscal years. In this supplemental notice, the FDIC delineates the categories of “financial activities” for purposes of the March 2011 proposal.
Federal Bank Regulators Seek Comment on Three Proposed Regulatory Capital Rules, Finalize Market Risk Rule
On June 12, the Federal Reserve Board, the OCC, and the FDIC jointly issued three proposed rules, which would implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The first proposed rule would, among other things, (i) raise the minimum regulatory capital levels; (ii) introduce an additional common equity capital buffer; and (iii) adopt a stricter definition of capital. Taken together, these requirements would require banking organizations to increase the quality and quantity of their regulatory capital. The second proposed rule incorporates aspects of Basel II’s Standardized Approach to enhance the risk-sensitivity of a banking organization’s risk-weighted assets calculations. In addition, the second proposed rule sets forth alternatives that would replace the use of external credit ratings, a change required by Section 939A of the Dodd-Frank Act. The third proposed rule would apply to banking organizations that are currently subject to the advanced approaches rule or to the market risk rule, and for the first time, to savings and loan holding companies that meet the relevant size, foreign exposure, and trading activity thresholds. This rule seeks to enhance the risk-based capital rules’ sensitivity to trading risks and also would eliminate the use of external ratings as required by Section 939A of the Dodd-Frank Act. Comments on each of the proposed rules can be submitted through September 7, 2012.
Concurrent with the proposed rules, the federal regulators released a final rule regarding market risk. By amending the calculation of market risk, the final rule seeks to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions. The final rule incorporates comments received in response to a January 2011 proposed rule, as well as a December 2011 amended proposed rule, and applies to a banking organization with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more. According to the regulators, the most significant change from the proposals relates to the methods for determining the capital requirements for securitization positions. The final rule will impose greater capital requirements on the more subordinate tranches in a securitization because the final rule mechanism to calculate the capital charges on securitization exposures when the underlying pool of assets demonstrates credit weakness was altered to focus on delinquent exposures rather than on cumulative losses. This rule takes effect January 1, 2013.
OCC Finalizes Rule to Replace Certain Credit Rating References with Alternative Creditworthiness Standards.
On June 13, pursuant to Section 939A of the Dodd-Frank Act, the OCC published a final rule with regard to regulations applicable to investment securities, securities offerings, and foreign bank capital equivalency deposits. The final rule is identical to the rule proposed by the OCC in November 2011 and will require national banks to assess whether a security issuer has an "adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure," a standard which may be met if the risk of default by the issuer is low and timely repayment of principal and interest is expected. For federal savings associations, the definition of "investment grade" would cross-reference the requirement established by the FDIC. Simultaneously, the OCC finalized guidance to outline measures (i) banks should put in place to demonstrate they have properly verified their investments, and (ii) institutions should put in place to demonstrate their compliance with due diligence requirements when making investments and reviewing investment portfolios. Specific due diligence factors will depend on the type of security, and firms will need to adjust the depth of due diligence to match the credit quality of the security, its complexity, and the size of the investment.