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OCC Issues Asset-Based Lending Booklet
On March 27, the OCC issued the Asset-Based Lending (ABL) booklet, which is new to the Comptroller’s Handbook. The booklet provides guidance to examiners and bankers on ABL activities and risks, prudent credit risk management and underwriting expectations, credit administration, and credit risk rating. It also provides risk-based expanded examination procedures related to structures, credit analysis, evaluating borrower liquidity, establishing a borrowing base and prudent advance rates, collateral controls and monitoring systems, and credit risk rating considerations. The booklet further includes transaction examples to assist with the assessment of credit risk.
Federal Regulators Propose Framework for State Supervision of Appraisal Management Companies
On March 24, the Federal Reserve Board, the OCC, the FDIC, the CFPB, the FHFA, and the NCUA proposed a rule to implement the Dodd-Frank Act’s minimum requirements for registration and supervision of Appraisal Management Companies (AMCs). While current federal regulations mandate that appraisals conducted for federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), this rule would represent the first affirmative federal obligations relating to the registration, supervision, and conduct of AMCs.
Generally, the proposed rule would establish a framework for the registration and supervision of AMCs by individual states that choose to participate, and for state reporting to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). Although state participation is optional, AMCs would be prohibited from providing appraisal management services for federally related transactions in states that do not establish such a program.
Comments on the proposal will be due 60 days following publication in the Federal Register.
Scope of Proposal
The proposal defines an AMC as any person that (i) provides appraisal management services to creditors or secondary mortgage market participants; (ii) provides such services in connection with valuing a consumer’s principal dwelling as security for a consumer credit transaction (including consumer credit transactions incorporated into securitizations); and (iii) within a given year, oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more state-certified or state-licensed appraisers in two or more States. “Appraisal management services” include, among other things, recruiting, selecting, and retaining appraisers and contracting with state-certified or –licensed appraisers to perform appraisal assignments. Notably, the rule would apply to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling, whereas current federal regulations apply only to appraisals for transactions that involve an entity regulated by a federal financial regulatory agency and that require the services of an appraiser (federally related transactions).
The definition of AMC does not cover commercial real estate transactions or securitizations involving commercial real estate mortgages and would not apply to a department or division of an entity when such a department or division provides appraisal management services only to that entity. However, affiliate AMCs would be covered, even if they only provide services to their affiliated entity.
Minimum Requirements for State Supervision Programs
The rule would require participating states to implement, within 36 months after the final rule takes effect, a licensing program within a state agency that has authority to: (i) review and approve or deny an AMC’s application for initial registration; (ii) review and renew or refuse to renew an AMC’s registration periodically; (iii) examine the books and records of an AMC operating in the state and require the AMC to submit reports, information, and documents; (iv) verify that the appraisers on the AMC’s appraiser list, network, panel, or roster hold valid state certifications or licenses, as applicable; (v) conduct investigations of AMCs to assess potential violations of applicable appraisal-related laws, regulations, or orders; (vi) discipline, suspend, terminate, and refuse to renew the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders; and (vii) report an AMC’s violation of applicable appraisal-related laws, regulations, or orders, as well as disciplinary and enforcement actions and other relevant information about an AMC’s operations, to the ASC.
Requirements for AMCs
The rule would require an AMC to register with, and be subject to supervision by, a state appraiser certifying and licensing agency in each state in which the AMC operates. As proposed, an AMC that is a subsidiary owned and controlled by a federally regulated insured depository institution or an insured credit union would be exempt from state registration requirements.
In addition, an all AMCs would be required to (i) use only state-certified or state-licensed appraisers for federally related transactions; (ii) establish processes and controls reasonably designed to ensure that the AMC engages appraisers who have the requisite education, expertise, and experience necessary to complete competently the assignment for the particular market and property type; (iii) establish processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with TILA requirements relating to appraisal independence; and (iv) require appraisers to perform appraisal assignments in accordance with USPAP.
Comptroller Curry Addresses Senior Management's AML Compliance Responsibilities, Criticizes "De-Risking"
On March 17, Comptroller of the Currency Thomas Curry reaffirmed his agency’s views with regard to BSA/AML compliance and the responsibilities of senior bank managers and boards of directors. Mr. Curry asserted that BSA infractions “can almost always be traced back to decisions and actions of the institution’s Board and senior management” and that the deficiencies underlying those infractions tend to involve failures in four areas: (i) the culture of compliance at the organization; (ii) the resources committed to BSA compliance; (iii) the strength of information technology and monitoring process; and (iv) the quality of risk management. Mr. Curry reported a recent positive trend, particularly at OCC-regulated large banks, which have increased spending and added BSA/AML compliance staff. He stated that such actions are one aspect of banks’ efforts to align “good compliance practices and the bank’s system of compensation and incentives.” The Comptroller criticized a separate trend of “de-risking”, in which banks avoid or end relationships with types of businesses deemed too risky. He warned that any business can be used for illicit purposes and “de-risking” is not a shortcut to circumvent a bank’s obligation to evaluate risk on an individual basis. He encouraged banks not to avoid high-risk businesses, but rather to apply stronger risk management and controls as necessary.
Prudential Regulators Finalize Midsize Bank Stress Test Guidance
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.
House Democrats Request Guidance On Banking Access For Marijuana Businesses
On March 5, a group of 16 Democratic U.S. House members sent letters to the leaders of the Federal Reserve Board, the OCC, the FDIC, and the NCUA requesting that the agencies issue guidance that would provide legitimate marijuana businesses access to the federal banking system. Last November, those agencies declined to provide such guidance, stating that the DOJ and FinCEN first needed to agree on a framework to apply BSA/AML provisions to banks seeking to serve marijuana businesses. With FinCEN and DOJ having recently issued such guidance, the lawmakers renewed their push for legitimate marijuana businesses—now operating in 20 states and the District of Columbia—to have “equal access to banking services as other licensed businesses.”
Comptroller Curry Comments On Outsourcing Risks
On March 4, Comptroller of the Currency Thomas Curry addressed the annual meeting of the Independent Community Bankers Association where he stressed the need for banks to effectively manage risk presented by the outsourcing of data security and information technology. The Comptroller explained that “[t]hird parties can be the weak link in [a bank’s] information systems security and resiliency; and especially where that third party is providing security services.” Referencing guidance the OCC issued last year, the Comptroller described the OCC’s due diligence expectations for banks’ third-party relationships as “substantial” and stressed that a bank’s due diligence needs to cover not only the vendor, but the vendor’s own third-party relationships. Mr. Curry also focused on other concerns he has about third-party relationships, including: (i) consolidation of service providers, which can increase the number of banks impacted when deficiencies occur at a single vendor; (ii) increased reliance by banks on foreign-based service providers; and (iii) third parties’ access to “large amounts of sensitive bank or customer data.”
OCC Issues Guidance Regarding Secured Consumer Debt Discharged In Bankruptcy
On February 14, the OCC issued Bulletin 2014-02, which clarifies supervisory expectations for national banks and federal savings associations regarding secured consumer debt discharged in Chapter 7 bankruptcy proceedings. The guidance describes (i) the analysis necessary to “clearly demonstrate and document that repayment is likely to occur,” which would preclude any charge-off as required by the Uniform Retail Credit Classification and Account Management Policy; and (ii) when a bank may consider post-discharge payment performance as evidence of collectability and when this performance demonstrates both capacity and willingness to repay the full amounts due. The OCC states that the repayment analysis should document (i) the existence of orderly repayment terms for structured collection of the debt without the existence of undue payment shock or the need to refinance the balloon amount; (ii) a history of payment performance that demonstrates the borrower’s ongoing commitment to satisfy the debt; and (iii) the consideration of post-discharge capacity to make future required payments. The guidance provides standards for post-discharge repayment capacity. Further, the guidance allows a bank to consider post-discharge payment performance as evidence of collectability, and states that the analysis can be conducted at a pool or individual level provided the bank considers whether (i) monthly payment includes both principal and interest that fully amortizes the remaining debt; (ii) sustained performance demonstrates ongoing capacity and willingness to repay post-discharge; and (iii) collateral levels indicate the bank is likely to recover the full amount due even if payments cease.
OCC Updates Mortgage Handbook, Retirement Plan Products Handbook
On February 7, the OCC issued an updated Mortgage Banking booklet of the Comptroller's Handbook. The revised booklet (i) provides updated guidance to examiners and bankers on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management; (ii) makes wholesale changes to the functional areas of production, secondary marketing, servicing, and mortgage servicing rights; and (iii) addresses recent CFPB amendments to Regulation X and Regulation Z, as well as other Dodd-Frank related statutory and regulatory changes. The updated booklet replaces a similarly titled booklet issued in March 1996, as well as Section 750 (Mortgage Banking) issued in November 2008 as part of the former OTS Examination Handbook. On February 12, the OCC issued a revised Retirement Plan Products and Services booklet of the Comptroller’s Handbook that (i) updates examination procedures and groups them by risk; (ii) updates references and adds a list of abbreviations; (iii) adds references to recent significant U.S. Department of Labor regulations and policy issuances; (iv) adds a discussion of Bank Secrecy Act/anti-money laundering and Regulation R; and (v) adds a discussion of board and senior management responsibilities regarding oversight of risk management.
OCC Names Deputy Comptroller For Large Bank Supervision
On January 29, the OCC announced that Molly Scherf will serve as Deputy Comptroller for Large Bank Supervision with responsibility for overseeing the Large Bank lead experts, shared national credit, data analytics, and systems teams. Her new role will involve working with policy, midsize, and community bank supervision, and legal departments within the OCC as well as with domestic and international regulatory peers. Ms. Scherf joined the OCC in 1990 and brings 23 years of bank supervision experience across institutions ranging from $50 million to $2 trillion in assets. She most recently served as Large Bank Lead Expert for Governance and Enterprise Risk Management and previously served as a megabank Team Lead at Wells Fargo.
OCC, FDIC Enforcement Action Targets Vendors' Risk Management
On January 17, the OCC released a cease and desist order entered jointly by the OCC and the FDIC with two affiliated technology service providers that offer payment and other technology solutions for banks. Without describing the specific circumstances leading to the action, the order states that the regulators had reason to believe the service providers were operating without (i) an internal auditor or an integrated risk-focused audit program; (ii) a comprehensive due diligence program or formal policies to evaluate vendor risk; (iii) an enterprise-wide risk assessment; (iv) effective business continuity or disaster recovery planning; (v) procedures to identify software vulnerabilities; and (vi) an effective log review program to identify threats. The regulators did not assess a penalty, but will require the vendors to implement numerous risk management enhancements. Under the order, the technology service providers or their board must, among other things, (i) fill specific management positions; (ii) implement an audit program; (iii) conduct a security risk assessment; (iv) develop a vendor management program; (v) implement business continuity/disaster recovery plans; and (vi) submit quarterly progress reports to regulators and client banks.