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  • OCC Acting Comptroller Shares Thoughts on Opportunities to Reduce Regulatory Burdens

    Federal Issues

    On October 5, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Midsize Bank Coalition of America Chief Risk Officer Meeting to discuss opportunities for regulatory reform.

    According to Noreika, one area of concern relates to the adverse effect arbitrary asset thresholds pose to the annual stress test requirements required under the Dodd-Frank Act because the burden “is not commensurate with the systemic risks presented by an institution.” Given the amount of diversity in the business models of banks who have around $10 billion in assets, “regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.” Noreika suggested an approach that would give federal banking agencies the authority to tailor statutory stress testing requirements without an asset threshold, thus reducing the risk of banks growing beyond the threshold to offset increased costs or staying below the threshold to avoid unwelcome scrutiny.

    Noreika also urged for interagency harmonization of guidance and policies to avoid conflicting regulatory guidance when addressing cybersecurity issues.

    Additionally, Noreika addressed the CFPB’s arbitration rule as an example of the need to work “to ensure regulation is balanced and appropriate by speaking up when we see proposed rules that may adversely affect the business of banking, have systemic effects, or result in perverse unintended consequences.” Noreika stated that prior to the publication of the final arbitration rule, the OCC requested access to the data the CFPB used to develop and support the rule in order to conduct an independent review. However, it was not until after the rule was published that the CFPB made the data available. According to OCC findings, the rule will adversely impact consumers by increasing costs. Community banks, Noreika noted, will also bear the burden of increased legal costs from defending lawsuits.

    Finally, Noreika commented that banks continue to face challenges when trying to implement Bank Secrecy Act compliance programs and adapt to new requirements under TRID, HMDA, and the Military Lending Act.

    Federal Issues Agency Rule-Making & Guidance OCC Bank Compliance Dodd-Frank Stress Test Arbitration CFPB Privacy/Cyber Risk & Data Security

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  • Federal Banking Agencies Issue Request for Comment on Proposed Combined Dodd-Frank Stress Test Report

    Agency Rule-Making & Guidance

    On October 6, the Federal Reserve Board (Fed), the FDIC, and the OCC (agencies)—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a joint notice and request for comment on a proposal to combine the agencies’ three separate, identical stress test report forms into a single new FFIEC report (FFIEC 016) under the Dodd-Frank Act. In addition to replacing the Fed’s FR Y–16, the FDIC’s DFAST 10–50, and the OCC’s DFAST 10–50B, a limited number of revisions would be made to align FFIEC 016 with “recent burden-reducing changes to the FFIEC 031 and FFIEC 041 Consolidated Reports of Condition and Income and the Fed’s FR Y–9C Consolidated Financial Statements for Holding Companies.” Under the proposal, institutions who have a Legal Entity Identifier will also be asked to include it on the report form.

    FFIEC 016 respondents are depository institutions and holding companies with at least $10 billion but less than $50 billion in total consolidated assets. The proposed FFIEC 016 will impact stress test reports with an as-of date of December 31, 2017, and have a submission deadline of July 31, 2018. Comments on the joint notice and request for comment must be received by December 5, 2017.

    Agency Rule-Making & Guidance FFIEC Federal Reserve OCC FDIC Dodd-Frank Stress Test

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  • FHFA Reports Results of Fannie Mae, Freddie Mac Annual Stress Tests

    Federal Issues

    One August 7, the Federal Housing Finance Agency (FHFA) published a report providing the results of the fourth annual stress tests conducted by government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs). In March 2017, the FHFA issued orders directing the GSEs to report the results of the required Dodd-Frank Act stress test to enable financial regulators to determine whether the companies have sufficient capital to support operations in adverse or severely adverse economic conditions. (See previous InfoBytes coverage here.) According to the report, Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario—which provides modeled projections on possible ranges of future financial results and does not define the entirety of possible outcomes—the GSEs will need to draw between $34.8 billion and $99.6 billion in incremental Treasury aid under a “severely adverse” economic crisis, depending on how deferred tax assets are treated. The losses would leave $158.4 billion to $223.2 billion available to the companies under their current funding commitment agreements. Notably, the projected bailout need is lower than what the FHFA reported last year, which ranged between $49.2 billion and $125.8 billion.

    Federal Issues Lending Mortgages Fannie Mae Freddie Mac Stress Test Dodd-Frank FHFA

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  • Federal Reserve Chair Comments on CCAR and Stress Test Transparency

    Agency Rule-Making & Guidance

    On June 16, Federal Reserve (Fed) Chair Janet Yellen sent a letter to Rep. Blaine Luetkemeyer (R-Mo.) underscoring the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. The Fed, Yellen asserts, will continue to published CCAR instructions in advance of the submission date for capital plans. Yellen further committed to releasing instructions and scenarios for the stress tests by February 15. The guidance will offer banks more details about the qualitative and quantitative components of the exam. However, Yellen warned that disclosing all the details of the Fed's modeling on the annual exams “would give banks an incentive to adjust their business practices in ways that change the results of the stress test without changing the risks faced by the firms . . . [resulting in] less effective stress tests that present a misleading picture of the actual vulnerabilities faced by firms. There would also be a risk of increased correlations in asset holdings among large banks, making the financial system more vulnerable to adverse economic shocks.” However, Yellen said the Fed is weighing different approaches to provide banks with more information about the agency's modeling.

    Agency Rule-Making & Guidance Federal Reserve Stress Test Congress CCAR

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  • Industry Groups Submit Comments on FHFA’s Proposed Evaluation Guidance for “Duty to Serve” Provisions

    Lending

    As previously discussed in InfoBytes, the Federal Housing Finance Agency (FHFA) published a final rule last December implementing certain “Duty to Serve” provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, the rule requires that Fannie Mae and Freddie Mac (Enterprises) adopt formal plans to improve the availability of mortgage financing in a “safe and sound manner” for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The FHFA also published a Proposed Evaluation Guidance to outline the following: (i) FHFA's expectations regarding the development of such Underserved Markets Plans, and (ii) the process by which FHFA will evaluate annually Fannie’s and Freddie’s achievements under their Plans. The deadline to submit comments was June 7.

    Mortgage Bankers Association (MBA) Letter. In its June 7 comment letter, the MBA stated that it commends efforts undertaken by the FHFA to develop a framework of requirements for the Enterprises to follow when preparing their Underserved Market Plans, as well as an evaluation system to rate implementation progress. Particularly, the MBA noted that, based on its data, the U.S. “will see 15.9 million additional households formed over the decade ending in 2024 . . . [which] will increase the need for all types of housing, including already limited affordable housing for very low-, low-, and moderate-income borrowers.” Furthermore, “manufactured home financing, affordable housing preservation, and additional rural housing opportunities can play a key role in providing both first-time home-buying opportunities and affordable rental options for consumers in these underserved markets.” With respect to the Proposed Evaluation Guidance, the MBA stressed the importance of flexibility so adjustments can be made for “unanticipated obstacles or opportunities caused by significant changes in market conditions that arise.”

    Center for Responsible Lending (CRL) Letter. Also on June 7, CRL issued a comment letter to the Proposed Guidance in which it offered recommendations concerning “public input and transparency, assessing the contents of the plants to ensure meaningful objectives, and the evaluation and scoring process.” Specifically, CRL noted that while the Enterprises have taken measures such as reinstating lower down payment programs and creating pilot programs to address the underserved markets, it believes a “robust duty to serve process will further access credit initiatives by promoting and incentivizing responsible and sustainable lending to lower wealth households.” However, the CRL also raised several issues over the Proposed Evaluation Guidance, specifically in terms of the proposed scoring system. Under current FHFA guidance, Enterprises’ plans are scored on three factors: progress, impact, and effort/implementation. Conversely, under the proposed scoring system, failure only occurs due to a lack of progress because the impact and effort criteria are assessed only after the Enterprise receives a pass/fail determination. In reaction, CRL raised the following concerns: (i) “What guards against Enterprises putting only low impact objectives in the plan?” (ii) “What incentives do Enterprises have to score highly (above minimally passing)?” and (iii) “What guards against only proposing easily achievable objectives?” In addition to scoring methodology changes, CRL recommended that the FHFA implement a more rigorous loan product and loan purchase evaluation process and increase transparency.

    Lending Mortgages FHFA Fannie Mae Freddie Mac Stress Test Agency Rule-Making & Guidance Affordable Housing

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  • Fannie, Freddie and FHLBs Ordered to Report Results of Annual Stress Tests

    Federal Issues

    On March 3, FHFA Director Melvin Watt issued orders directing FHFA regulated government-sponsored enterprises (GSEs)—Fannie Mae (Order No. 2017-OR-FNMA-01), Freddie Mac (Order No. 2017-OR-FHLMC-01), and the 11 Federal Home Loan Banks collectively (Order No. 2017-OR-B-01)—to report the results of their stress tests so that the financial regulators may determine whether the GSEs “have the capital necessary to absorb losses as a result of adverse economic conditions.” The orders were issued pursuant to the requirement under the Dodd-Frank Act that covered financial institutions with total consolidated assets of more than $10 billion conduct an annual stress test to determine whether they have sufficient capital to support operations in adverse economic conditions. Accompanying each order was a copy of the “2017 Report Cycle Dodd-Frank Stress Tests Summary Instructions and Guidance.”

    On April 14, the FHFA order was officially published in the Federal Register.

    Federal Issues Lending Mortgages Fannie Mae Freddie Mac FHLB Stress Test Dodd-Frank FHFA

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  • FDIC Issues Revised Scenarios for 2017 Stress Tests

    Agency Rule-Making & Guidance

    On February 13, the FDIC released revised economic scenarios for use by certain financial institutions with total consolidated assets of more than $10 billion for 2017 stress tests. According to a statement from the agency, the previously released scenarios contained incorrect historical values for the BBB corporate yield in 2016. The Fed and OCC, with whom the FDIC works develop and distribute the scenarios, also issued revised data.

    Agency Rule-Making & Guidance FDIC Federal Reserve OCC Stress Test

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  • OCC Proposes Final Revisions to Stress Test Information Collection

    Federal Issues

    On February 2, the OCC requested comment on proposed revisions to an existing information collection entitled “Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $50 Billion or More Under the [Dodd-Frank Act].” The agency is also giving notice that it has sent the collection to the OMB for review. This information collection is related to the conduct of annual stress tests that the Dodd-Frank Act requires of certain financial companies, including national banks and federal savings associations. Comments on the current notice must be received by March 6, 2017.

    Federal Issues Banking Dodd-Frank OCC Stress Test OMB Bank Regulatory Agency Rule-Making & Guidance

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  • OCC, FDIC, and Fed Release Stress Test Scenarios for 2017

    Federal Issues

    On February 3, the Fed announced the release of the “Supervisory Scenarios” to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and also issued instructions to firms participating in CCAR. The Fed also published three letters that provide additional information on its stress-testing program. The three letters describe: (i) the Horizontal Capital Review for large, noncomplex companies; (ii) the CCAR qualitative assessment for U.S. intermediate holding companies of foreign banks, which are submitting capital plans for the first time; and (iii) improvements to how the Fed will estimate post-stress capital ratios.

    On February 3, the OCC similarly released economic and financial market scenarios for 2017 that are to be used by national banks and federal savings associations (with total consolidated assets of more than $10 billion) in their annual Dodd-Frank Act-mandated stress test. On February 6, the FDIC released its stress test scenarios, working in consultation with the Fed and OCC.

    The three sets of supervisory scenarios provide each agency with forward-looking information for use in bank supervision and will assist the agencies in assessing the covered institutions’ risk profile and capital adequacy.

    Federal Issues FDIC Banking Dodd-Frank Federal Reserve OCC Bank Supervision Stress Test CCAR Bank Regulatory Agency Rule-Making & Guidance

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  • GAO Report Recommends Additional Actions to Help Achieve Dodd-Frank Stress Test Goals

    Federal Issues

    On November 15, the GAO released its report entitled Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals. The report had been requested in September 2014 by House Financial Services Committee Chairman Jeb Hensarling in order to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests. Highlights of the Report can be found here.

    The GAO was asked to review and assess the effectiveness of each of the Fed’s two stress test programs for certain banking institutions. Accordingly, the GAO analyzed Fed rules, guidance, and internal policies and procedures and assessed practices against federal internal control standards and other criteria. The GAO also interviewed Federal Reserve staff and officials at 19 banking institutions. The report sets forth 15 recommendations that the GAO believes will help improve the effectiveness of the Fed’s stress test programs. The recommendations include, among other things, improving disclosures and communications to firms, expanding model risk management, and reconsidering potential consequences of the Fed’s scenario design choices. The GAO has reported that the Fed “generally agreed with the recommendations and highlighted select ongoing and future efforts.”

    In a November 15 press release, House Financial Services Committee Chairman Jeb Hensarling used the GAO report to critique the Fed’s lack of transparency with regard to certain activities under the Dodd-Frank Act. Among other things, Rep. Hensarling stated, “[t]he GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers.” Rep Hensarling cautioned further that “[t]he changes recently proposed by the Federal Reserve to its stress testing process are inadequate,” and the GAO report “demonstrates the absolute need for the new President to designate a Vice-Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve.”

    Federal Issues Consumer Finance Dodd-Frank Federal Reserve GAO Stress Test

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