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Banking Regulators Provide Guidance on Basel III Implementation Timeline, Congress Offers Additional Responses to Basel III Proposals
On November 9, the Federal Reserve Board, the OCC, and the FDIC announced that proposed rules to implement the Basel III regulatory capital accords will not take effect on January 1, 2013. The agencies cite the large volume of comments received in response to the proposed rules as the reason for the delay. Recently, members of three states’ congressional delegations joined others in submitting letters to the federal banking regulators in response to the proposed Basel III regulations. The letters all raise concerns about the potential disproportionate impact of the proposed rules on smaller, community and regional institutions, and challenge the attempt by regulators to apply international accords to all U.S. institutions regardless of size. Members of the Texas delegation focused on provisions that would require all unrealized gains and losses on available-for-sale securities to flow through to common Tier-1 equity, which the lawmakers believe will require community banks to divert capital resources from customer services and bank growth. Indiana Members added concerns about the effect of proposed excessive risk weighting and restrictions on dividends and discretionary bonuses, while Members from South Carolina echoed general concerns about the impact of the proposals on community banks. These legislators join other federal and state policymakers who have submitted similar comments in recent weeks. Scrutiny of the proposals will continue next week with a Senate Banking Committee hearing planned for November 14, 2012 to review the pending rules with representatives from the Federal Reserve Board, the OCC, and the FDIC.
HUD and Banking Regulators Offer Borrower and Institution Relief Following Hurricane Sandy
Recently, HUD has made a series of announcements regarding housing relief for individuals displaced by Hurricane Sandy. For example, on October 30 HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA-insured mortgages. Similar announcements have followed for victims in New York, Connecticut, and Rhode Island. Also on October 30, the Federal Reserve Board, the OCC, and the FDIC issued a statement on supervisory practices impacted by the hurricane. For example, the regulators stated that “prudent efforts to adjust or alter terms on existing loans in affected areas should not be subject to examiner criticism.”
Federal Banking Regulators Issue Guidance Regarding Supervision of Technology Service Providers
On October 31, the Federal Financial Institutions Examination Council (FFIEC) issued a revised Supervision of Technology Service Providers Booklet (TSP Booklet). The revised TSP Booklet, which is part of the FFIEC Information Technology Examination Handbook, provides guidance for examiners and financial institutions on the supervision of technology service providers by describing the federal banking regulators’ statutory authority to supervise third-party service providers, outlining the regulators’ risk-based supervision program, and providing the Uniform Rating System for examinations. The TSP Booklet clarifies that outsourced activities should be subject to the same risk management, security, privacy, and other internal controls and compliance policies as if such functions were performed internally, and that a financial institution’s board of directors and management have the responsibility for ensuring that outsourced activities are conducted in a safe and sound manner and in compliance with applicable laws and regulations.
Concurrent with the release of the updated TSP Booklet, the Federal Reserve Board, the FDIC, and the OCC issued new Administrative Guidelines for the Implementation of Interagency Programs for the Supervision of Technology Service Providers. The Guidelines are separate from the FFIEC IT Examination Handbook and describe how the agencies implement their interagency supervisory programs. The Guidelines are primarily a resource for examiners and include the reporting templates used by examiners.
Independent Financial Regulators Express Opposition to Senate Regulatory Analysis Bill
On October 26, the leaders of the Federal Reserve Board, the OCC, the FDIC, the CFPB, the NCUA, and the SEC sent a letter to Senators Lieberman (I-CT) and Collins (R-ME) opposing S. 3468, which would authorize the President to require that regulations promulgated by the independent regulatory agencies be subject to regulatory review in the same manner as other federal agencies, including central review of certain rules by the Office of Information and Regulatory Affairs. The regulators note that the bill, which was introduced by Senator Portman (R-OH) with the support of Senator Warner (D-VA) in August 2012, may be considered soon for markup by the Committee on Homeland Security and Governmental Affairs led by Mr. Lieberman and Ms. Collins. The letter argues that by giving the President unprecedented authority to influence policy and rulemaking functions of independent regulatory agencies through review of regulations, the bill would undermine congressional intent to create certain agencies that could exercise policymaking functions independent of any Administration.
Federal District Court Holds Ohio Post-Repossession Notice Requirements Not Preempted
On October 17, the U.S. District Court for the Northern District of Ohio held that the post-repossession notice requirements in the Ohio Retail Installment Sales Act (RISA) and the Ohio Uniform Commercial Code (OUCC) were not preempted by the National Banking Act (NBA) and OCC regulations. White v. Wells Fargo Bank, N.A., Case No. 1:12 CV 943, 2012 WL 4958516 (N.D. Ohio Oct. 17, 2012). A group of borrowers allege on behalf of a putative class that the lender violated provisions of RISA and the OUCC when it repossessed and sold borrowers’ cars after the borrowers defaulted on their auto loans. The lender filed a motion to dismiss the action, claiming that, because it is a national bank, the NBA and applicable OCC regulations preempt borrowers’ RISA and OUCC claims. Following precedent from the Ninth and Fourth Circuits, the Ohio court held that the state laws regarding repossession notice requirements fell within the savings provision of the NBA and thus were not expressly preempted. The court also held that the federal government had not occupied the field of debt collection, and that the Ohio laws at issue do not relate to the bank’s lending operations and therefore do not significantly interfere with its ability to operate as a bank. Accordingly, the court denied the lender’s motion to dismiss on preemption grounds.
OCC Provides Stress Test Guidance for Community Banks
On October 18, the OCC issued Bulletin OCC 2012-33, which provides guidance to community banks with assets of $10 billion or less on how to implement stress testing to assess risk in their loan portfolios. Stress tests are exercises designed to gauge the potentially adverse impact that a hypothetical scenario might have on earnings, loan loss reserves, and capital levels. The OCC reiterated that stress testing procedures for smaller community banks do not need to be as sophisticated as those used by larger national banks, but noted that all banks are expected to assess their capital adequacy in relation to overall risks and to have a plan for maintaining appropriate capital levels. The bulletin also included explanations of specific types of stress testing, a sample method for performing stress tests on a basic portfolio, and a table of common real estate characteristics that should be considered when evaluating the impact of a stress event on specific property types. Additionally, the OCC announced the availability of a new tool for performing stress tests on income-producing commercial real estate loan portfolios. The OCC plans to host a teleconference for bankers on December 3, 2012 to discuss this new guidance.
Federal Regulators Finalize Bank Stress Test Rules
On October 9, the OCC and the FDIC each finalized a rule to implement the company-run stress test requirements of the Dodd-Frank Act. The stress tests are exercises designed to gauge the losses that covered institutions might experience under hypothetical scenarios established by the regulators. The OCC and FDIC rules apply to covered institutions with average total consolidated assets greater than $10 billion. Covered institutions with assets over $50 billion are subject to the stress test requirements immediately. They will be required to submit results in January 2013 of stress tests based on data as of September 30, 2012 and scenarios that the FDIC and the OCC plan to publish next month. Implementation of the stress test requirements for institutions with assets of $10 billion to $50 billion will not begin until October 2013. Also on October 9, the Federal Reserve Board (FRB) finalized two stress test-related rules. The first rule establishes the stress test requirements for bank holding companies, state member banks, and savings and loan companies with more than $10 billion in total consolidated assets. As with the OCC and FDIC rules, the FRB rule delays implementation of stress test requirements for covered institutions with $50 billion or less in assets until the fall of 2013. Additionally, the results of that first test will not have to be publicly disclosed. The second FRB rule establishes the company-run stress test requirements for bank holding companies with $50 billion or more in total consolidated assets, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. These institutions are required to conduct two internal stress tests each year, in addition to a stress test performed by the FRB. Like the OCC and the FDIC, the FRB expects to release its stress test scenarios in November.
Federal Nonbank Charter Legislation Faces Opposition from State AGs
On October 5, forty-one state attorneys general (state AGs) reasserted their interest in enforcing state laws regulating short-term, small dollar lenders, including payday lenders. The National Association of State Attorneys General sent a letter to the leadership of the U.S. House of Representatives and the U.S. Senate urging them to oppose H.R. 6139, the Consumer Credit Access, Innovation, and Modernization Act. As previously reported, the Act, introduced by Reps. Luetkemeyer (R-MO) and Baca (D-CA), would allow the OCC to establish a federal charter for certain nonbanks. The state AGs charge that H.R. 6139 would preempt state laws governing consumer lending and generally would undermine states’ authority with regard to consumer protection enforcement. The state AGs acknowledge that the bill would allow them to enforce violations of federal law, but argue that state laws designed for local markets would be preempted and the state AGs’ ability to target abuses as they emerge would be impaired. During a July hearing on the legislation, the OCC and the Conference of State Bank Supervisors also expressed opposition to the legislation.
State Regulators Oppose Basel III Capital Requirements
On October 3, the Conference of State Bank Supervisors (CSBS) announced its opposition to the “highly reactionary” approach federal regulators have proposed to implement the Basel III capital accord. Although they support higher levels and improved quality of capital, the state regulators argue that the transaction-level approach proposed by federal regulators is too complex and leaves the financial system susceptible to more volatility. Instead, the state regulators favor an approach based on risk management and the supervisory process. Further, the state regulators charge that the federal proposal, including the proposed specific risk-weighted asset requirements, lack empirical support. The CSBS argues that the proposed standardized risk-weighted assets present a specific challenge to mortgage lending, and in other areas would replace supervisory judgment and institution-specific analysis. The state regulators believe that implementing Basel III as currently proposed will only increase industry costs, limit credit availability, and force industry consolidation.
CFPB Continues Credit Card Enforcement Activity
On October 1, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and several of its subsidiaries alleged to have violated multiple consumer financial protection laws. According to the CFPB, the investigations conducted by it and other federal regulators and a state regulator revealed that the companies (i) charged illegal late fees, (ii) discriminated on the basis of age in the offering of credit, (iii) engaged in deceptive marketing, and (iv) failed to properly report consumer credit disputes. To resolve the allegations, the companies agreed to enter into several different consent orders. Two orders obtained by the CFPB and a joint CFPB/FDIC order require three of the subsidiaries collectively to refund approximately $85 million to approximately 250,000 customers and pay a cumulative $18 million in civil money penalties. Likewise, the OCC issued a consent order that includes an additional $500,000 penalty, and provides for restitution that overlaps with the broader restitution ordered by the CFPB. Finally, an order obtained by the Federal Reserve Board, requires the company, and certain of its subsidiaries, to pay an additional $9 million penalty. Furthermore, pursuant to the various orders, the companies agreed to undergo an independent audit and implement enhanced compliance systems to address the alleged illegal practices. This is the third public CFPB-led enforcement action aimed at credit card companies, and the first to go beyond allegations regarding ancillary products and resolve alleged violations of the CARD Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act.