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Regulatory Update - May 2015

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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
May 27, 2015 – FDIC Quarterly Banking Profile
The Federal Deposit Insurance Corporation (FDIC) released its Quarterly Banking Profile for the first quarter of 2015. Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $39.8 billion in the first quarter of 2015, up $2.6 billion (6.9 percent) from a year earlier. The increase in earnings was mainly attributable to a $4.3 billion rise in net operating revenue (net interest income plus total noninterest income). Of the 6,419 insured institutions in the first quarter of 2015, nearly two-thirds (62.7 percent) reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the first quarter fell to 5.6 percent from 7.4 percent a year earlier.
Read the full FDIC Quarterly Banking Profile >>

May 27, 2015 – Report on the Economic Well-Being of U.S. Households
The Federal Reserve Board's (FRB) latest survey of the financial and economic conditions of American households finds that individuals' overall perceptions of financial well-being improved modestly between 2013 and 2014, but their optimism about future financial prospects increased significantly. Looking forward, households are increasingly optimistic. Twenty-nine percent of survey respondents say they expect their income to be higher in the year following the survey, compared to 21 percent of 2013 respondents. The survey results reveal a lack of economic preparedness among many adults. Only 53 percent of respondents indicate that they could cover a hypothetical emergency expense costing $400 without selling something or borrowing money. Thirty-one percent of respondents report going without some form of medical care in the past year because they could not afford it. The survey was conducted on behalf of the FRB in October and November 2014. More than 5,800 respondents completed the survey.
Read the full FRB report >>

May 26, 2015 – Federal Reserve Assesses the Community Reinvestment Act’s Role in the Financial Crisis
An important question arising out of the financial crisis is whether the Community Reinvestment Act (CRA) played a significant role in the subprime mortgage crisis by pushing banks to make loans to risky borrowers. Numerous observers have argued that the CRA may have compelled banks to take excessive risk in order to expand their lending to lower-income communities and comply with CRA requirements. The FRB released a “FEDS Notes” commentary piece that assesses the strength of this argument by discussing how the CRA is enforced and by examining the available empirical evidence on the link between the CRA and risky lending. Overall, according to the FRB’s analysis, there appears to be little reason to believe that the CRA was an important factor in the subprime boom and subsequent crash. Not only is the law explicitly written and enforced to avoid pushing banks too far, but empirical research, by and large, also finds little connection between the CRA-related activities of banks and the expansion of risky or subprime mortgage lending.
Read the full FRB “FEDS Note” >>

May 21, 2015 – FRB Proposes Revising Liquidity Requirements to Include Certain Bonds
The FRB proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy regulatory requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress. Under the Liquidity Coverage Ratio (LCR) requirement adopted by the federal banking agencies in September 2014, large banking organizations are required to hold high-quality liquid assets that can easily and quickly be converted into cash within 30 days during a period of financial stress. The proposed rule would allow investment grade, general obligation U.S. state and municipal bonds to be counted as high-quality liquid assets up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities.
Read the full FRB Press release >>

May 19, 2015 – Financial Stability Oversight Council Releases 2015 Annual Report

The Financial Stability Oversight Council (FSOC) released its 2015 annual report, which was developed collaboratively by the members of the Council and their agencies and staffs. Under the Dodd-Frank Act, the Council reports annually to Congress on a range of issues, including significant financial market and regulatory developments, potential emerging threats to the financial stability of the United States, and the activities of the Council. The report also makes recommendations to promote market discipline; maintain investor confidence; and enhance the integrity, efficiency, competitiveness, and stability of U.S. financial markets. The 2015 annual report, which is the Council’s fifth, provides a consolidated and unified view of the key challenges facing our financial system and offers a road map of the Council’s key priorities for the upcoming year.
Read the 2015 FSOC Annual Report >>

May 14, 2015 – Regulation and Supervision of Community Banks
Federal Reserve Governor Jerome Powell offered remarks to the Annual Community Bankers Conference regarding the state of community banking. Governor Powell discussed the challenges currently faced by community banks, including factors driving community bank consolidation and higher numbers of “problem” banks as compared to pre-crisis levels. Governor Powell stated that the Federal Reserve Board is conscious of the effect that regulations have on community banks and that regulations are tiered to be commensurate with the risks presented by different institutions. The Federal Reserve Board has undertaken “substantial efforts” to tailor its supervisory practices to the size of an institution being examined, and Governor Powell offered examples of the effects of such tailored supervisory practices on the community banking community.
Read Governor Powell’s full remarks >>

May 12, 2015 – Progress on the Resolution of Systemically Important Financial Institutions

FDIC Chairman Martin Gruenberg addressed the Peterson Institute for International Economics on the progress the FDIC has made in developing a framework under the Dodd-Frank Act for the orderly failure of a large, complex, systemically important financial institution while avoiding the taxpayer bailouts and the market breakdowns that took place in the recent financial crisis. The Progress Report includes detail regarding the steps FDIC has taken to strengthen bankruptcy by ensuring the objectives of the Living Will process will be met as well as details regarding the Orderly Liquidation Authority. The largest bank holding companies and designated non-bank financial companies are required to prepare resolution plans, also referred to as "living wills," under Title I of the Dodd-Frank Act which must demonstrate that the firm could be resolved under bankruptcy without severe adverse consequences for the financial system or the U.S. economy. As a backstop, for circumstances in which an orderly bankruptcy process might not be possible, Title II of the Dodd-Frank Act provides the Orderly Liquidation Authority which allows the FDIC to manage the orderly failure of the firm.
Read FDIC Chairman Gruenberg’s full remarks >>

May 5, 2015 – CFPB Report Finds 26 Million Consumers Are “Credit Invisible”
The Consumer Financial Protection Bureau (CFPB) published a report finding that 26 million Americans are “credit invisible.” This figure indicates that one in every 10 adults do not have any credit history with a nationwide consumer reporting agency. The report also found that Black consumers, Hispanic consumers, and consumers in low-income neighborhoods are more likely to have no credit history with a nationwide consumer reporting agency or not enough current credit history to produce a credit score. The analysis was conducted using information from the CFPB’s Consumer Credit Panel, which is a random sample of de-identified credit records purchased from one of the nationwide credit reporting agencies and is representative of the population with credit records. By comparing information in the credit panel from December 2010 with 2010 Census data, the Bureau was able to estimate the number of consumers who were credit invisible or had unscored credit records.
Read the full CFPB “Credit Invisibles” Report >>

May 4, 2015 – Addressing Regulatory Burden for Community Banks
In remarks to attendees of an Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) outreach meeting in Boston, FDIC Chairman Martin Gruenberg and Comptroller of the Currency Thomas Curry addressed efforts underway to ease regulatory burden on community banks and savings associations. FDIC Chairman Gruenberg reiterated the FDIC's intent to continue examining ways to reduce or eliminate outdated or unnecessary regulatory requirements and to streamline and clarify processes and rules. Chairman Gruenberg identified several themes which have been commonly communicated during the EGRPRA effort, which include: evaluating whether laws and regulations based on longstanding thresholds should be changed; the potential for increasing the size of the institutions eligible for longer examination intervals; and concerns regarding burdens and costs related to Call Reports. In addition, Comptroller Curry acknowledged that smaller banks and thrifts lack the same type of resources as larger institutions, and therefore, unnecessary rules should be eliminated as allowed.
Read FDIC Chairman Gruenberg’s full remarks >>
Read OCC Comptroller Curry’s full remarks >>

REGULATORY GUIDANCE

May 11, 2015 – CFPB Guidance to Help Lenders Avoid Discrimination Against Consumers Receiving Public Housing Assistance
The CFPB issued a bulletin to help mortgage lenders avoid illegal discrimination against applicants whose income includes vouchers from the Section 8 Housing Choice Voucher (HCV) Homeownership Program. Discriminating against a consumer because some or all of their income is from a public assistance program may violate federal fair lending protections. The Equal Credit Opportunity Act prohibits creditors from discriminating against an applicant because some or all of the applicant’s income is from a public assistance program, such as the Section 8 HCV Homeownership Program. The bulletin offers guidance for lenders in managing their fair lending risk, including the importance of clear underwriting policies, providing training for underwriters and loan originators, and ensuring careful monitoring for compliance with underwriting policies.
Read the full CFPB bulletin >>

May 1, 2015 – Revised FFIEC Interagency Examination Procedures for Consumer Compliance
The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council recently developed interagency examination procedures for the Truth in Lending Act (TILA), implemented by Regulation Z in addition to the Real Estate Settlement Procedures Act (RESPA), implemented by Regulation X. The procedures reflect CFPB amendments to both regulations, published in the Federal Register in December 2013 (Regulation Z) and February 2015 (RESPA), respectively. Most of the changes to the procedures relate to the integrated mortgage disclosure requirements under TILA and RESPA, commonly referred to as the “TRID” requirements.
Read the full OCC bulletin and revised examination procedures >>

RECENT ENFORCEMENT ACTION ACTIVITY
May 28, 2015 – Mortgage Lending Discrimination
The Department of Justice (DOJ) and CFPB filed a consent order to resolve allegations that Provident Funding Associates (Provident) engaged in a pattern or practice of discrimination that increased loan prices for African-American and Hispanic borrowers who obtained residential mortgages between 2006 and 2011 from Provident’s nationwide network of mortgage brokers. Under the terms of the proposed settlement, Provident will pay $9 million into a fund for the benefit of victims of its alleged mortgage lending discrimination.  The proposed settlement provides for an independent administrator to contact and disburse payments to borrowers whom the agencies identify as victims of Provident’s discrimination, at no cost to the borrowers.  
Read the full Department of Justice press release >>

May 28, 2015 – Overcharging on Student Loans
The Department of Justice announced that, starting this June, 77,795 service members will begin receiving $60 million in compensation for having been charged excess interest on their student loans by Navient Corp., the student loan servicer formerly part of Sallie Mae. The payments are required by a settlement that the DOJ reached with Navient last year to resolve the federal government’s first-ever lawsuit filed against owners and servicers of student loans for violating the rights of service members eligible for benefits and protections under the Servicemembers Civil Relief Act (SCRA). The Justice Department’s complaint in that lawsuit alleged that three defendants (collectively Navient) engaged in a nationwide pattern or practice, dating as far back as 2005, of violating the SCRA by failing to provide members of the military the 6 percent interest rate cap to which they were entitled for loans incurred before their military service began.
Read the full Department of Justice press release >>

May 20, 2015 – Illegal Foreign Exchange Manipulation
Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland (RBS) agreed to plead guilty to conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market, and the banks agreed to pay criminal fines totaling more than $2.5 billion. A fifth bank, UBS AG, agreed to plead guilty to manipulating the London Interbank Offered Rate (LIBOR) and other benchmark interest rates and pay a $203 million criminal penalty. All five banks will continue cooperating with the government’s ongoing criminal investigations, and no plea agreement prevents the Department of Justice from prosecuting culpable individuals for related misconduct. Citicorp, Barclays, JPMorgan, and RBS will send disclosure notices to all of their customers and counter-parties that may have been affected by the sales and trading practices described in the plea agreements.
Read the full Department of Justice press release >>

May 19, 2015 – Illegal Credit Product Enrollment
The CFPB filed a complaint and proposed consent order in federal court against PayPal, Inc. for illegally signing up consumers for its online credit product, PayPal Credit, formerly known as Bill Me Later. The CFPB alleges that PayPal deceptively advertised promotional benefits that it failed to honor, signed consumers up for credit without their permission, made them use PayPal Credit instead of their preferred payment method, and then mishandled billing disputes. Under the proposed order, PayPal would pay $15 million in consumer redress and a $10 million penalty, and it would be required to improve its disclosures and procedures.
Read the full CFPB press release >>

May 7, 2015 – Discriminatory Motorcycle Lending

Evergreen Bank Group of Oak Brook, Illinois, will eliminate or limit the discretion it gives to motorcycle dealers to increase interest rates as part of a settlement of a federal lawsuit alleging a pattern or practice of national origin and race discrimination in motorcycle lending, the Justice Department announced. In addition to the elimination of dealer discretion, which is consistent with a policy that Evergreen voluntarily adopted in March 2014, the settlement will provide $395,000 in compensation for victims of Evergreen’s past discrimination. The complaint alleges that Evergreen violated the Equal Credit Opportunity Act by charging approximately 2,200 Hispanic and African-American borrowers higher interest rates than non-Hispanic white borrowers between January 2011 and March 2014.  The complaint alleges that Evergreen’s FreedomRoad Financial motorcycle lending unit charged borrowers higher interest rates because of their national origin or race and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.
Read the full Department of Justice press release >>

May 1, 2015 – Violations of the International Emergency Economic Powers Act and the Trading with the Enemy Act
BNP Paribas S.A. (BNP Paribas), a global financial institution headquartered in Paris, was sentenced for conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) by processing billions of dollars of transactions through the U.S. financial system on behalf of Sudanese, Iranian and Cuban entities subject to U.S. economic sanctions. BNP Paribas was sentenced to a five-year term of probation and ordered to forfeit $8.8 billion to the United States and to pay a $140 million fine. The sentencing is the first time a financial institution has been convicted and sentenced for violations of U.S. economic sanctions, and the total financial penalty—including the forfeiture and criminal fine—is the largest financial penalty ever imposed in a criminal case.
Read the full Department of Justice press release >>

GRANT THORNTON ANNOUNCEMENTS
Implementing the TILA/RESPA Integrated Disclosures
On August 1, 2015, the Truth in Lending Act (TILA) / Real Estate Settlement Procedures Act (RESPA) Integrated Disclosures – commonly known as “TRID” – for mortgage originations will take effect, representing a major overhaul to a set a required disclosures that have become familiar and routine for mortgage lenders, settlement agents, realtors, and attorneys across the industry. The Good Faith Estimate (GFE) and the initial Truth In Lending (TIL) disclosures will be combined into one form, the Loan Estimate (LE), while the HUD-1 and final TIL will be consolidated into a single Closure Disclosure (CD). To address the changes, risks, and opportunities associated with TRID, Grant Thornton recently published an article exploring the impacts of the new TRID requirements. The article outlines key regulatory changes, highlights the major areas of risk, and offers guidance on effectively implementing the integrated disclosures into your current mortgage originations program.
Read the full article >>

Thank you again for your continued interest in Grant Thornton’s monthly Regulatory Update. To discuss challenges impacting your business – or industry developments in general – please contact us to schedule a conversation.