Regulatory Update - February 2015

Grant Thornton’s monthly Regulatory Update tracks key regulatory news and enforcement activity within the financial services industry so you can stay informed about the impact of current events on your business.
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Industry News
February 24, 2015 – FDIC Quarterly Banking Profile
The Federal Deposit Insurance Corporation (FDIC) released its Quarterly Banking Profile for the fourth quarter of 2014. Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $36.9 billion during the fourth quarter, down $2.9 billion (7.3 percent) from earnings of $39.8 billion that the industry reported a year earlier. The decline in earnings was mainly attributable to a $4.4 billion increase in litigation expenses at a few large banks. Community banks earned $4.8 billion during the quarter. Fourth quarter net income of $4.8 billion at community banks was up $1.0 billion (27.7 percent) from a year earlier, driven by higher net interest income, increased noninterest income, and lower loan-loss provisions.
Read the full Quarterly Banking Profile >>

February 20, 2015 – Interagency Effort to Reduce Regulatory Burden
The federal bank regulatory agencies requested comment on a second set of regulatory categories as part of their review to identify outdated or unnecessary regulations applied to insured depository institutions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the Federal Financial Institutions Examination Council (FFIEC), Office of the Comptroller of the Currency (OCC), FDIC, and Board of Governors of the Federal Reserve System (FRB) to review their regulations at least every 10 years. The agencies also are required to categorize and publish the regulations for comment and submit a report to Congress that summarizes any significant issues raised. The agencies have divided their regulations into 12 categories and requested comments in June 2014 for three categories. The second notice was published February 13, 2015 seeking comment on regulations in three additional categories: banking operations; capital; and the Community Reinvestment Act.
Read the federal register notice seeking comment >>

February 19, 2015 – Post-Crisis Capital Requirements Impacting Industry
Still emerging from the financial crisis that rattled world markets nearly seven years ago, the industry continues to transform, driven primarily by the efforts of the Federal Reserve and other regulators to strengthen the amount of capital held by big banks. The capital rules have had the effect of encouraging banks to focus on parts of their operations in which they are potentially taking fewer risks and de-emphasizing trading desks. New capital rules have forced banks to reconsider every business line. The capital rules have not had nearly as much impact on traditional commercial banks that focus on products and services such as mortgages and small-business lending, encouraging banks to expand in those areas while they shrink their Wall Street divisions.
Read the full news article >>

February 18, 2015 – CFPB Risk-Focused Supervision Program
CFPB Deputy Director Steven Antonakes offered remarks regarding the Bureau’s risk-focused supervision program that emphasizes conducting examinations based on distinct product lines that focus on risks to consumers rather than risks to institutions. The CFPB evaluates each product line based on potential for consumer harm related to a particular market; the size of the product market; the supervised entity’s market share; and risks inherent to the supervised entity’s operations and offering of financial consumer products within that market.
Read the full prepared remarks >>

February 10, 2015 – Community Bank Challenges
During testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Doreen Eberley – Director, FDIC Division of Risk Management Supervision – stated that the FDIC will continue to pursue regulatory burden reduction for community banks while preserving safety and soundness goals. According to Director Eberley, “the FDIC is keenly aware of the impact that its regulatory requirements can have on smaller institutions, which operate with fewer staff and other resources than their larger counterparts. Therefore, the FDICs pays particular attention to the impact its regulations may have on smaller and rural institutions that serve areas that otherwise would not have access to banking services.” As a result, the FDIC will continue to explore ways to improve supervisory processes and reduce regulatory burden on the industry.
Read the full testimony >>

February 9, 2015 – Consumer Frustration with Reverse Mortgages
The Consumer Financial Protection Bureau (CFPB) released a report highlighting the top complaints concerning reverse mortgages. According to the report, consumers are frustrated with their loan terms, servicer runarounds, and foreclosure problems. To help consumers who already have a reverse mortgage, the CFPB is issuing an advisory with tips on how to plan ahead to protect loved ones from financial hardship brought on by a reverse mortgage. While reverse mortgages are only available to people over the age of 62, only about 42 percent of the complaints were from consumers who described themselves as 62 or older. The remaining consumers likely included the younger spouses or family members of borrowers.
Read the full CFPB report >>

February 3, 2015 – SEC Alerts Investors, Industry on Cybersecurity
The Securities and Exchange Commission (SEC) released publications that address cybersecurity at brokerage and advisory firms and provide suggestions to investors on ways to protect their online investment accounts. A Risk Alert from the SEC's Office of Compliance Inspections and Examinations contains observations based on examinations of more than 100 broker-dealers and investment advisors. The examinations focused on how firms identify cybersecurity risks; establish cybersecurity policies/procedures/oversight; protect their networks and information; identify and address risks associated with remote access to client information, funds transfer requests, and third-party vendors; and detect unauthorized activity.
Read the full SEC Risk Alert and Investor Bulletin >>

January 29, 2015 – Access To Credit In Rural And Underserved Areas
The CFPB proposed several changes to its mortgage rules to facilitate responsible lending by small creditors, particularly in rural and underserved areas. If finalized, the proposal would increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas and help small creditors adjust their business practices to comply with the new rules. The proposed amendments would expand the definition of “small creditor”; include mortgage affiliates in calculation of small creditor status; expand the definition of “rural” areas; provide grace periods for small creditor and rural or underserved creditor status; and provide additional implementation time for small creditors.
Read the full CFPB proposal >>

January 26, 2015 - Strategies for Improving the U.S. Payment System
The Federal Reserve issued "Strategies for Improving the U.S. Payment System," which presents a multi-faceted plan for collaborating with payment system stakeholders including large and small businesses, emerging payments firms, card networks, payment processors, consumers, and financial institutions to enhance the speed, safety, and efficiency of the U.S. payment system. "A safer, more efficient and faster payment system contributes to public confidence and economic growth," said Federal Reserve Board Governor Jerome H. Powell. The Federal Reserve undertook an extensive 18-month research program aimed at identifying key gaps and opportunities, gaining industry and end-user perspectives on needs and priorities and defining ways to achieve payment improvements. "Strategies for Improving the U.S. Payment System" details the conclusions of those efforts.
Read the full FRB press release >>

Regulatory Guidance
February 23, 2015 – Interagency Guidance: Regulatory Capital Reporting Changes
The FFIEC has approved revisions to the reporting of risk-weighted assets in Part II of Schedule RC-R, Regulatory Capital, of the Consolidated Reports of Condition and Income (Call Report). These changes to Schedule RC-R, Part II, incorporate the standardized approach for calculating risk-weighted assets under the banking agencies’ revised regulatory capital rules. A limited change to Schedule RC-L, Derivatives and Off-Balance Sheet Items, revises the reporting of securities borrowed. Subject to approval by the U.S. Office of Management and Budget, these Call Report changes will take effect March 31, 2015.
Read the full interagency guidance >>

February 23, 2015 – Interagency Guidance: Business Continuity Planning Booklet Appendix J
Update to FFIEC IT Examination Handbook Series
The FFIEC has issued an appendix to the Business Continuity Planning (BCP) booklet of the FFIEC Information Technology Examination Handbook entitled “Strengthening the Resilience of Outsourced Technology Services.” The booklet is part of the IT Examination Handbook series and provides guidance to assist examiners in evaluating the risk management processes of financial institutions and service providers to ensure the availability of critical financial services. Appendix J of the BCP Booklet discusses the following four key elements of BCP that a financial institution should address to ensure that their technology service providers (TSPs) are providing resilient technology services: Third-Party Management; Third-Party Capacity; Testing with Third-Party TSPs; and Cyber Resilience.
Read the full interagency guidance >>

February 11, 2015 – Interagency Guidance: Tool for Calculating Capital Requirements Under Simplified Supervisory Formula Approach
The OCC, FRB, and FDIC have developed an automated tool to help national banks and federal savings associations calculate risk-based capital requirements for securitization exposures. The agencies are making this tool available for all banks that use the simplified supervisory formula approach to help calculate associated capital requirements. At their discretion, banks may use the tool to help calculate regulatory capital requirements for securitization exposures under the revised capital rule. Use of the tool, however, is not required, nor is it a component of regulatory reporting.
Read the full interagency guidance >>

February 6, 2015 - Regulatory Revision of Small and Intermediate Small Bank and Savings Association Asset Thresholds for CRA
The OCC, FRB, and FDIC are amending their Community Reinvestment Act (CRA) regulations to adjust the asset size thresholds used to define ‘‘small bank’’ or ‘‘small savings association’’ and ‘‘intermediate small bank’’ or ‘‘intermediate small savings association.’’ As required by the CRA regulations, the adjustment to the threshold amount is based on the annual percentage change in the Consumer Price Index. Beginning January 1, 2015, banks and savings associations that, as of December 31 of either of the prior two calendar years, had assets of less than $1.221 billion are small banks or small savings associations. Small banks and small savings associations with assets of at least $305 million as of December 31 of both of the prior two calendar years and less than $1.221 billion as of December 31 of either of the prior two calendar years are intermediate small banks or intermediate small savings associations.
Read the full interagency amendment >>

February 2, 2015 – Interagency Guidance: Guidance on Private Student Loans with Graduated Repayment Terms at Loan Origination
The FRB, CFPB, FDIC, OCC, and National Credit Union Administration issued joint guidance, in conjunction with the State Liaison Committee, pertaining to student loans with graduated repayment terms. The guidance recognizes that students leaving a higher education program may prefer more flexibility with their payments as they transition into the labor market. Financial institutions that originate private student loans with graduated repayment terms should prudently underwrite the loans and provide disclosures that clearly communicate the timing and the amount of payments to facilitate a borrower's understanding of the loan's terms and features.
Read the full interagency guidance >>

January 28, 2015 – FDIC FIL-5-2015: Statement on Providing Banking Services
The FDIC issued guidance encouraging supervised institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk.
Read the full FDIC guidance >>

Recent Enforcement Action Activity
February 26, 2015 – Morgan Stanley
Morgan Stanley will pay $2.6 billion to the U.S. government to resolve potential claims stemming from the sale of mortgage bonds before the financial crisis, reducing its 2014 profit by more than half. Morgan Stanley increased its legal reserves by about $2.8 billion, which lowered its 2014 income from continuing operations by $2.7 billion, or $1.35 per share, the bank said in a regulatory filing. The Morgan Stanley settlement is the latest in string of Justice Department efforts to extract record penalties from major banks for inappropriately marketing risky mortgage securities in the run-up to the financial crisis.
Read the full news article >>

February 26, 2015 – 4 Star Resolution LLC and Vantage Point Services, LLC
The Federal Trade Commission (FTC), jointly with the New York State Office of the Attorney General, has filed complaints aimed at shutting down two particularly egregious and abusive debt collection operations centered in Buffalo, New York that target consumers nationwide. According to the complaints, the separate enterprises – 4 Star Resolution LLC and Vantage Point Services, LLC – used threats and abusive language, including false threats that consumers would be arrested, to collect more than $45 million in supposed debts. Both complaints charge the respective defendants with violating the Federal Trade Commission Act and the Fair Debt Collection Practices Act as well as several New York State laws prohibiting deceptive acts and practices. In filing the complaints, the FTC and the New York Attorney General’s Office are seeking to permanently stop the defendants’ illegal conduct and to obtain money to provide refunds to consumers.
Read the full FTC press release >>

February 5, 2015 – Wells Fargo
Wells Fargo & Co agreed to pay $4 million for violations on credit card accounts at a former affiliate. Wells Fargo will pay a $2 million penalty and $2 million in restitution to consumers after the affiliate illegally took interests in borrowers' homes in exchange for extending credit for routine credit card purchases. The state of New York’s Department of Financial Services found the violations in loans made through the bank's NowLine Visa Platinum Credit Card Account product. The issues arose from the state's examinations of accounts in 2005 and 2008, according to a consent order.
Read the full news article >>

February 3, 2015 – Standard & Poor’s Ratings Services
The Department of Justice and 19 states and the District of Columbia entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC (S&P), along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia. Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. Other allegations assert that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.
Read the full DOJ press release >>

January 30, 2015 – First American Title Lending and Finance Select                 
The Federal Trade Commission took action for the first time against two car title lenders, reaching settlements that will require them to stop their use of deceptive advertising to market title loans. A car title loan is typically a high cost, short-term loan, secured with the consumer’s car title. In administrative complaints issued against two title lenders, First American Title Lending and Finance Select, Inc., the FTC charged that the companies advertised, both online and in print, zero percent interest rates for a 30-day car title loan without disclosing important loan conditions or the increased finance charge imposed after the introductory period ended.
Read the full FTC press release >>

Regulatory Calendar – Upcoming Committee Hearings
House Committee on Financial Services
March 3, 2015 – The Semi-Annual Report of the Bureau of Consumer Financial Protection
An update from the CFPB on efforts to achieve the Bureau’s mission to protect consumers in the financial marketplace.
Access the House Committee hearings page >>

Senate Committee on Banking, Housing & Urban Affairs

March 3, 2015 – Federal Reserve Accountability and reform
Hearing on the “Federal Reserve Accountability and Reform.” The witnesses will be: Dr. John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; and Dr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute.
Access the Senate Committee hearings page >>

Grant Thornton Announcements
Grant Thornton recently published two informational pieces related to significant new regulatory guidance aimed at strengthening governance and risk management practices for large institutions.

OCC Risk governance guidelines go beyond “heightened expectations”
New guidelines from the OCC aimed at strengthening governance and risk management at large U.S. financial institutions replace past ambiguity with clear language that sets forth how covered institutions are expected to go about establishing and adhering to written frameworks governing management and control of their risk-taking activities.
Read the full article >>

Enhanced prudential standards: How foreign banks are affected
In February 2014, the FRB approved a final rule strengthening the supervision and regulation of large U.S. bank holding companies and foreign banking organizations (FBOs) under the Dodd-Frank Act’s Section 165. Enhanced prudential standards (EPS) provide a framework for supervising and regulating large domestic and foreign financial institutions. In the big picture, EPS is intended to help banks anticipate and lessen risks while bolstering the resiliency of bank operations. U.S.-based global financial institutions have spent a significant amount of their time and resources meeting compliance requirements in recent years. For FBOs, EPS represents the most significant development since the International Banking Act of 1978, which introduced the principle of national treatment for international banking organizations.
Read the full article >>

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