InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
NCUA Publishes Advance Notice Regarding Use of Financial Derivatives Transactions to Offset Interest Rate Risk
On February 3, the NCUA published a second advance notice of proposed rulemaking seeking additional comments to identify the conditions for federal credit unions to engage in certain derivatives transactions to offset interest rate risk. The second notice follows one issued in June 2011, which requested comment on potentially modifying NCUA’s rule on investment and deposit activities to allow such derivative transactions. The current notice focuses on the ability of federal credit unions to independently engage in derivative transactions, without the oversight of a third-party provider. The NCUA is seeking comment on eligibility requirements and safety and soundness considerations that might limit the types of derivatives that federal credit unions may use, exposure limits, and counterparty risk. Comments responding to the notice must be received by April 3, 2012.
NCUA Issues Final Interest Rate Risk Rule
On February 2, the National Credit Union Administration (NCUA) issued a final rule amending Part 741 of its insurance rules to require certain federally insured credit unions (FICUs) to adopt written interest rate risk policies and programs. These interest rate risk policies and programs must include five elements: (i) Board approval, (ii) Board oversight and management implementation, (iii) risk-measurement systems to assess the interest rate risk sensitivity of earnings and/or asset and liability values, (iv) internal controls to monitor adherence to interest rate risk limits, and (v) decision-making that is informed and guided by interest rate risk measures. The new rule applies to all FICUs with assets greater than $50 million and to any FICU with assets between $10 million and $50 million that has a Supervisory Interest Rate Risk Threshold ratio (SIRRT ratio) greater than 1:1. FICUs can calculate their SIRRT ratio by adding together their portfolios of first mortgage loans and investments with maturities greater than five years, and dividing that figure by the FICU’s net worth. The final rule also contains guidance on how to develop an interest rate risk policy and program that is based on generally recognized best practices for safely and soundly managing interest rate risk. The rule is effective September 30, 2012.
Two Federal Appeals Courts Address Enforceability of Arbitration Agreements
This week, the U.S. Courts of Appeals for the Second and Eleventh Circuits issued rulings regarding the enforceability of arbitration clauses in customer agreements. On January 31, the Eleventh Circuit, on remand from the U.S. Supreme Court, reversed its earlier unpublished decision that affirmed a district court ruling allowing a consumer class action to proceed against a bank because the class action waiver in the arbitration agreement at issue was substantively unconscionable. The underlying case involves allegations that the bank improperly ordered customer transactions in order to maximize overdraft fees. The bank sought to enforce the arbitration clause in its customer agreement. Given the U.S. Supreme Court's holding in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act establishes a broad policy requiring arbitration of such disputes, and preempts state law that may allow class actions despite customer arbitration agreements, the Eleventh Circuit vacated its earlier decision and remanded the case to the district court for further proceedings and reconsideration of the bank's original motion to compel arbitration.
On February 1, the Second Circuit decided not to enforce an arbitration agreement, notwithstanding the Supreme Court's decision in Concepcion. In this case, merchants sued a credit card provider arguing that the card provider's interchange fee system violated federal antitrust laws. The card company moved to compel arbitration and enforce a class action waiver provision in the merchant agreement. The Second Circuit vacated a district court decision to enforce the arbitration agreement. That decision in turn was vacated by the Supreme Court and remanded. The Second Circuit, though, did not find that Concepcion altered its original analysis, and the Second Circuit again held that the class action waiver agreement was unenforceable in this case because the practical effect would be to preclude the merchants' ability to pursue statutory rights, an issue not addressed by Concepcion. Consistent with prior Supreme Court caselaw untouched by Concepcion, the merchants proved as a matter of law that the costs of individual arbitration with the lender would be so costly as to deprive them of statutory protections granted by the antitrust laws.
NCUA Proposes Rule Regarding Loan Workouts and Nonaccrual Policies
On February 1, the National Credit Union Administration (NCUA) published a proposed rule related to the management of loan workouts and nonaccrual policies for loans. The rule as proposed would, for all federally insured credit unions, (i) establish standards for the management of loan workout arrangements and require written workout policies, (ii) revise requirements for reporting troubled debt restructured (TDR) loans, including the calculation and reporting of TDR loan delinquency based on restructured contract terms, (iii) prohibit accruing interest on loans at least ninety days past due (with some exceptions), and (iv) maintain member business workout loans in nonaccrual status until the credit union receives six consecutive payments under the modified loan terms. The NCUA is accepting comments on the proposed rule through March 2, 2012.
NCUA Issues List of Regulations Subject to Regulatory Review
On January 30, the NCUA issued a list of regulations to be reviewed in 2012. The NCUA reviews one third of its rules every year to ensure that the regulations are "clearly articulated and easily understood" and that substantive concerns are considered as well. This year, in the spirit of Executive Order 13579 regarding agency regulatory review, the NCUA is seeking comments to help it modify, streamline, expand, or repeal rules that are not required by statute and would not jeopardize safety and soundness. Rules under review this year include, for example, those covering (i) corporate credit unions, (ii) unfair or deceptive acts or practices, (iii) Truth in Savings, (iv) investment and deposit activities, and (v) bank conversions and mergers. The NCUA is accepting comments on the listed regulations through August 3, 2012.
FTC and DOJ Obtain Settlement of Claims Against Debt Buyer
On January 30, the FTC and the DOJ announced that a Michigan-based debt buyer had agreed to pay a $2.5 million civil penalty to settle allegations of misconduct in connection with the company's debt collection activities. The FTC alleged that the debt buyer violated the FTC Act, the Fair Debt Collection Practices Act, and the Fair Credit Reporting Act by, among other things, (i) misrepresenting without substantiation that consumers owed a debt, (ii) failing to disclose that certain time-barred debt did not have to be repaid, (iii) knowingly providing false information to credit reporting agencies, and (iv) failing to investigate disputes raised by credit reporting agencies. In addition to paying the civil penalty, the company must address the failures and misconduct alleged by the FTC. For example, it must inform consumers when a debt is too old to be legally enforceable. Further, the company is prohibited from engaging in certain conduct, such as placing debt on consumer credit reports without notifying the consumer. Concurrent with the announcement, the FTC released a publication to help consumers understand their rights with regard to time-barred debt.
OCC Publishes Proposed Stress Test Rule
On January 24, the OCC published a proposed rule to implement annual capital-adequacy stress tests for national banks and federal savings associations with total consolidated assets of more than $10 billion. The rule is substantially similar to a recent FDIC stress test proposal for FDIC-insured state nonmember banks and state-chartered savings associations. (See InfoBytes, January 20, 2012). The Dodd-Frank Act requires these stress tests to aid regulators in assessing risk presented by an institution's capitalization and help ensure the institution’s financial stability. Under the proposal, the OCC would annually provide covered institutions with at least three sets of conditions - baseline, adverse, and severely adverse - that must be used in conducting an annual stress test. The tests would include calculations showing, for each quarter-end within a defined planning horizon, (i) estimates of revenues, (ii) potential losses, (iii) loan loss provisions, and (iv) potential impact on regulatory capital levels and ratios. Covered institutions also would be required to establish an oversight and documentation system to ensure that stress testing procedures are effective. Stress test results would have to be submitted to the OCC and the Federal Reserve Board by January 5 of each year, and a summary would have to be released to the public within ninety days thereafter. The OCC would plan to provide covered institutions with the scenarios at least two months before the January 5 deadline. The OCC is accepting public comment on the rule through March 26, 2012.
House Subcommittee Holds Hearing on CFPB Under Director Cordray
On January 24, the House Oversight Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs held a hearing to receive testimony from newly appointed CFPB Director Richard Cordray. Committee members (i) sought the Director’s interpretation of the term “abusive” as it is used in the Dodd-Frank Act, (ii) requested more transparency into the CFPB’s planned regulatory actions, and (iii) requested CFPB action to mitigate the impacts of its regulations on small and community institutions. Mr. Cordray declined to offer a definition of “abusive”, relying instead on the statutory language. The Director did state that abusive practices that are not also either “unfair or deceptive”, likely would be addressed on a “facts and circumstances” basis rather than through an “abstract” regulatory definition. He did not rule out using “abusive practices” as the basis of an enforcement action prior to issuing any further guidance or rulemaking. The Director committed to consider following the SEC’s model of periodically publishing a regulatory agenda. He also explained that the CFPB will consider and address impacts of its regulatory actions on community banks and financial institutions with under $10 billion in assets.
CFPB and FTC Announce Memorandum of Understanding to Coordinate Regulatory Activities
On January 23, the CFPB and the FTC announced that the agencies had entered into a memorandum of understanding (MOU) to facilitate coordination of the agencies’ consumer financial rulemaking, enforcement, and supervision activities. The MOU establishes regular meetings between the two entities, as well as processes for providing notice of enforcement activities. Under the MOU, the CFPB and the FTC will be able to share consumer complaint information, and the FTC can request CFPB examination reports and confidential supervisory information.
CFPB Holds Field Hearing on Payday Lending, Releases Payday Lending Exam Guide
On January 19, the CFPB held a field hearing in Birmingham, Alabama to discuss payday lending products. The hearing, which was the first such hearing held by the CFPB, included three panels featuring CFPB staff, consumer groups, and industry representatives. In conjunction with the event, the CFPB also released its “Short-Term, Small-Dollar Lending Procedures,” which is a field guide for use in examining bank and nonbank payday lenders. These procedures are structured to mirror payday lending activities ranging from initial advertising to collection practices. The CFPB will prioritize its supervision of payday lenders depending on the perceived risk to consumers, taking into account factors such as a lender’s volume of business and the extent of existing state oversight. In remarks at the event, Director Richard Cordray stated that there are some payday lenders and practices that deserve more urgent attention because they present immediate risk to consumers and are “clearly illegal.” The Director identified two examples of such practices, including (i) unauthorized debits on a consumer’s checking account that can occur when the consumer unknowingly “is dealing with several businesses hidden behind a payday loan,” any one of which could be a “fraudster” merely seeking the customer’s private financial information, and (ii) “aggressive debt collection tactics” including “posing as federal authorities, threatening borrowers with criminal prosecution, trying to garnish wages improperly, and harassing the borrower.”