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Regulatory Update - June 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
June 30, 2015 – OCC Report Discusses Risks Facing National Banks and Federal Savings Associations
The Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective for Spring 2015, which names interest rate, underwriting, strategic, compliance, and cybersecurity as top concerns. The report, which covers risks facing national banks and federal savings associations based on data through the end of 2014, also noted declining revenues and profitability overall in OCC-supervised institutions. The report presents data in four main areas: the operating environment, bank condition, key risk issues, and regulatory actions and focuses on issues that pose threats to the safety and soundness of financial institutions regulated by the OCC. 
Read the full OCC Semiannual Risk Perspective for Spring 2015 >>

June 29, 2015 – OCC Releases Quarterly Report on Bank Trading and Derivatives Activities
The OCC released its Quarterly Report on Bank Trading and Derivatives Activities, showing that insured U.S. commercial banks and savings institutions reported trading revenue of $7.7 billion in the first quarter of 2015, $3.2 billion higher (72 percent) than in the fourth quarter of 2014. Trading revenue in the first quarter was $1.5 billion higher (24 percent) than in the first quarter of 2014. Additionally, credit exposures from derivatives increased as net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, rose $147 billion (41 percent) to $503 billion.
Read the full OCC Quarterly Report on Bank Trading and Derivatives Activities >>

June 25, 2015 – GAO Releases Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response
The Government Accountability Office (GAO) released a report entitled Bank Regulation: Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response that assesses monitoring efforts on the part of banking regulators to identify and respond to emerging threats to the banking system. GAO reviewed its prior studies and those of federal banking regulators, the regulators' inspectors general, and academics and incorporated the regulatory lessons learned into a two-part framework for monitoring regulators' efforts to identify and respond to such risks. First, the framework incorporates quantitative information in the form of financial indicators that can help users of the framework track and analyze emerging risks and qualitative sources of information on emerging risks such as regulatory reports and industry and academic studies. Second, the framework monitors regulatory responses to emerging risks, such as agency guidance, with the goal of flagging issues for further review when questions arise about the effectiveness of these responses.
Read the full GAO report >>

June 25, 2015 – Mortgage Performance Improved During the First Quarter of 2015
The performance of first-lien mortgages serviced by eight national banks improved during the first quarter of 2015, according to the OCC quarterly report on mortgage performance. The OCC Mortgage Metrics Report, First Quarter 2015, showed 94.2 percent of mortgages included in the report were current and performing at the end of the quarter, compared with 93.1 percent a year earlier. The percentage of mortgages that were 30 to 59 days past due was 1.9 percent of the portfolio, a 7.0 percent decrease from a year earlier. Seriously delinquent mortgages – 60 or more days past due or held by bankrupt borrowers whose payments are 30 days or more past due – made up 2.6 percent of the portfolio – a 16.4 percent decrease from a year earlier. Foreclosure activity among the reporting servicers also declined compared with a year earlier.
Read the full OCC Mortgage Metrics Report >>

June 25, 2015 – Disparate Impact Upheld by the U.S. Supreme Court
The U.S. Supreme Court preserved a key tool used for more than four decades to fight housing discrimination, upholding Texas’s Fifth Circuit Court of Appeals’ decision that disparate impact claims are cognizable under the Fair Housing Act. The justices ruled 5-4 that federal housing law allows people to challenge lending rules, zoning laws, and other housing practices that have a harmful impact on minority groups, even if there is no proof that companies or government agencies intended to discriminate. The ruling is a perceived victory for housing advocates who argued that the Fair Housing Act allows challenges to race-neutral policies that have negative effects on minorities. The U.S. Department of Justice has used disparate impact lawsuits to win more than $500 million in legal settlements from companies accused of bias against black and Hispanic customers. The ruling was a perceived defeat for banks, insurance companies, and other business groups that claimed such lawsuits — often based on statistics — are not explicitly allowed under the landmark housing law that sought to eliminate segregation that has long existed in residential housing.
Read the full news article >>

June 24, 2015 – OFR Financial Stability Update: Risks Remain Moderate
The U.S. Office of Financial Research (OFR) released an update to its assessment of threats to financial stability, concluding that overall risks to financial stability remain moderate. OFR concerns about such threats continue to include increased risk-taking in a climate of persistently low interest rates, fragile and fragmented market liquidity in some securities markets, and continued migration of financial activity outside the banking system. The OFR cited these risk themes previously in its 2014 Annual Report. The OFR’s latest assessment of vulnerabilities in the financial system was informed by updating the OFR Financial Stability Monitor and the Monitor’s underlying data. The Monitor is a tool the OFR developed to display a high-level summary of five areas of risk: macroeconomic, market, credit, funding and liquidity, and contagion. By looking across the financial system at functional categories of vulnerabilities, the Monitor can help identify potential threats in the financial system wherever they arise.
Read the OFR’s Financial Stability Monitor >>

June 24, 2015 – CFPB Proposes Two-Month Extension of “Know Before You Owe” Mortgage Rule
The Consumer Financial Protection Bureau (CFPB) issued a proposed amendment to the “Know Before You Owe” mortgage disclosure rule, which proposes to move the rule’s effective date to October 3, 2015. The rule, also called the Truth in Lending Act – Real Estate Settlement Procedures Act (TILA-RESPA) Integrated Disclosure rule, requires easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The Bureau is issuing the proposal to correct an administrative error that would have delayed the effective date of the rule by at least two weeks until August 15 at the earliest.
Read the full CFPB proposal >>

June 23, 2015 – CFPB Releases Summer 2015 Supervisory Highlights
The CFPB released its latest supervision report – Summer 2015 Supervisory Highlights – outlining the illegal practices uncovered by the Bureau’s examiners in the first four months of 2015. The Bureau found problems with dual-tracking at mortgage servicers that could mislead consumers to believe their trial modifications were canceled. The Bureau also found a lack of quality control measures in place at consumer reporting agencies. The report shows that across all industries, CFPB supervisory resolutions resulted in remediation of $11.6 million to more than 80,000 consumers.
Read the full CFPB Summer 2015 Supervisory Highlights >>

June 10, 2015 – CFPB to Oversee Nonbank Auto Finance Companies
The CFPB published a rule that will allow the agency to supervise larger nonbank auto finance companies for the first time. The CFPB also released the examination procedures that examiners will use to ensure that auto finance companies are following the law. Currently, the CFPB supervises auto financing at the largest banks and credit unions. This rule extends that supervision to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year. Under the rule, those companies will be considered “larger participants,” and the CFPB may oversee their activity to ensure they are complying with federal consumer financial laws including the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts or practices. Under the final rule, the CFPB estimates that it will have authority to supervise about 34 of the largest nonbank auto finance companies and their affiliated companies that engage in auto financing.
Read the full CFPB press release >>

June 4, 2015 – CFPB Study Finds Reverse Mortgage Advertisements Can Create False Impressions
The CFPB released results of a focus group study on reverse mortgage advertisements that found many participants were left with misimpressions about the product. After viewing the advertisements, consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives. The CFPB also issued an advisory that warns consumers that many reverse mortgage ads do not tell the full story.
Read the full CFPB reverse mortgage advertisements study >>

June 3, 2015 – Comptroller Discusses Payment Technology, Innovation, and Cybersecurity
Comptroller of the Currency Thomas J. Curry discussed emerging payment systems technology, innovation, access, and cybersecurity in banking during a speech at the 2015 BITS Emerging Payment Forum. Comptroller Curry's remarks focused on how digital payments have transformed the manner in which buyers and sellers connect and the implications that changing delivery channels and technologies may have on banks in the near future.
Read Comptroller Curry’s full remarks >>

June 3, 2015 – OCC Mid-Cycle Status Report on Fiscal Year 2015 Operating Plan
The OCC released a mid-cycle report on key actions completed to date to execute its annual operating plan and priority objectives for the remainder of the year. The operating plan provides the foundation for the development of individual bank supervisory strategies and policy initiatives. OCC staff use this plan to guide their supervisory priorities, planning, and resource allocations. The document released provides a mid-cycle status report on some of the key accomplishments and priorities for the remainder of the year. According to the plan, supervisory priorities for the remainder of the fiscal year include: Strategic planning and execution, cybersecurity, corporate governance, operational risk, loan underwriting, stress testing, interest rate risk, and compliance.
Read the full OCC Mid-Cycle Operating Plan Status Report >>

REGULATORY GUIDANCE
June 30, 2015 – FDIC Releases Interagency Consumer Compliance Examination Procedures for TILA-RESPA Mortgage Rules
The FDIC released revised interagency examination procedures for the new TILA-RESPA Integrated Disclosure rule as well as amendments to other provisions of TILA Regulation Z and RESPA Regulation X. The examination procedures should be helpful to financial institutions seeking to better understand the areas on which the FDIC will focus as part of the examination process.
Read the full FDIC Financial Institution Letter >>

June 22, 2015 – Agencies Issue Modified Flood Insurance Rule
Five federal regulatory agencies announced the approval of a joint final rule that modifies regulations that apply to loans secured by properties located in special flood hazard areas. The final rule implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. The final rule also implements provisions in the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act) relating to the force placement of flood insurance. In accordance with HFIAA, the final rule requires regulated lending institutions to escrow flood insurance premiums and fees for loans secured by residential improved real estate or mobile homes that are made, increased, extended, or renewed on or after January 1, 2016 unless the loan qualifies for a statutory exception. In addition, certain regulated lending institutions are exempt from this escrow requirement if they have total assets of less than $1 billion.  Further, the final rule requires institutions to provide borrowers of residential loans outstanding as of January 1, 2016 the option to escrow flood insurance premiums and fees. The final rule includes new and revised sample notice forms and clauses concerning the escrow requirement and the option to escrow.
Read the full interagency final rule >>

June 19, 2015 – FTC Proposes Gramm-Leach-Bliley Rule Amendment for Auto Dealer Online Privacy Notices
The Federal Trade Commission (FTC) proposed an amendment to its rules under the Gramm-Leach-Bliley Act to allow auto dealers that finance car purchases or provide car leases to provide online updates to consumers about their privacy policies as opposed to sending yearly updates by mail. Under the proposed revision, auto dealers would be able to provide consumers with the privacy policy solely online as long as the company notifies consumers on a yearly basis that the policy is viewable online. The rule change would require this notification to be part of some other legally required document provided to consumers.
Read the full FTC press release >>

June 16, 2015 – Interagency Revisions to the Capital Rules Applicable to Advanced Approaches Banking Organizations
The Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and OCC finalized revisions to the regulatory capital rules adopted in July 2013. The final rule applies only to large, internationally active banking organizations that determine their regulatory capital ratios under the advanced approaches rule – generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposures. The agencies published changes to the rules affecting these organizations on December 18, 2014, and the final rule adopts these changes substantially as proposed. The final rule corrects and updates certain aspects of the advanced approaches rule, including the calculation requirements for risk-weighted assets for advanced approaches banking organizations. Many of the changes enhance consistency of the advanced approaches with international capital standards. The final rule will be effective October 1, 2015.
Read the full interagency final rule >>

June 15, 2015 – Revised OCC “Residential Real Estate Lending” Booklet
The OCC issued a revised version of the “Residential Real Estate Lending” booklet of the Comptroller’s Handbook. This revised booklet replaces the “Real Estate Loans” booklet issued in March 1990 (and examination procedures issued in March 1998). The revised booklet also replaces section 212, “One- to Four-Family Residential Real Estate Lending,” issued in February 2011 as part of the former Office of Thrift Supervision Examination Handbook for the examination of federal savings associations. The revised booklet incorporates and reflects applicable national bank and federal savings association statutes and regulations, guidance, and examination procedures. The booklet also provides updated guidance to examiners on assessing and managing the risks associated with residential real estate lending activities.
Read the full OCC Residential Real Estate Lending booklet >>

June 9, 2015 – Final Interagency Standards for Assessing Diversity Policies and Practices
Federal agencies issued a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the entities they regulate. Section 342 of the Dodd-Frank Act required the FRB, CFPB, OCC, FDIC, National Credit Union Administration, and the Securities and Exchange Commission to establish an Office of Minority and Women Inclusion at each agency to be responsible for all matters relating to diversity in management, employment, and business activities. The final standards provide a framework for regulated entities to create and strengthen their diversity policies and practices – including their organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of organizational diversity and inclusion within the entities’ U.S. operations.
Read the full interagency policy statement >>

RECENT ENFORCEMENT ACTION ACTIVITY
June 17, 2015 – Aggressive Debt Collection Tactics Against Servicemembers
The CFPB sued an auto loan company, Security National Automotive Acceptance Company, for aggressive debt collection tactics against servicemembers. In a complaint filed in federal court, the CFPB alleges that the company used a combination of illegal threats and deceptive claims in order to collect debts. The CFPB is seeking compensation for harmed consumers, a civil penalty, and an order prohibiting the company from committing future violations. The CFPB alleges that the company violated the Dodd-Frank Act’s prohibitions against unfair, deceptive, and abusive acts or practices by using aggressive collection tactics that took advantage of servicemembers’ special obligations to remain current on debts. Both active-duty and former servicemembers could encounter trouble with the company if they missed or were late on payments. Once consumers defaulted, they became subject to repeated threats to contact their chain of command. In other instances, the company exaggerated the consequences of not paying.
Read the full CFPB complaint >>

June 5, 2015 – Violations of the Loan Originator Compensation Rule
The CFPB ordered a California mortgage bank, Guarantee Mortgage Corporation, to pay a civil penalty of $228,000 for paying its branch managers based, in part, on the interest rates of the loans they closed. The Loan Originator Compensation Rule, which the CFPB has enforced since July 2011, protects consumers from being steered into costlier loans by prohibiting loan originators from receiving compensation based on the interest rates of the loans they close.
Read the full CFPB press release >>

June 4, 2015 – Mortgage Kickbacks
CFPB Director Richard Cordray issued a decision in the first appeal of a CFPB administrative enforcement proceeding. The Director’s decision concludes that PHH Corp., a mortgage lender, illegally referred consumers to mortgage insurers in exchange for kickbacks. He also issued a final order that prohibits PHH from violating the law and requires the company to pay $109 million to the CFPB. Director Cordray issued a decision upholding in part, and reversing in part, Administrative Law Judge Cameron Elliot’s November 2014 Recommended Decision, which held that PHH violated the Real Estate Settlement Procedures Act when it accepted kickbacks for loans that closed on or after July 21, 2008. Those kickbacks took the form of mortgage reinsurance premiums that the mortgage insurers paid to a subsidiary of PHH.
Read the full CFPB press release >>

June 4, 2015 – Steering Mortgage Applicants Towards High-Cost Options
The CFPB filed a complaint in federal district court against RPM Mortgage, Inc. and its CEO, Erwin Robert Hirt, for illegally paying bonuses and higher commissions to loan originators to incentivize them to steer consumers into costlier mortgages. The CFPB also filed a proposed order that, if entered by the court, would require RPM to pay $18 million in redress to consumers and a $1 million civil penalty, and would require Hirt to pay an additional $1 million civil penalty. In April 2011, RPM instituted a compensation plan that gave loan officers financial incentives to steer consumers into higher-rate mortgage loans. RPM provided its loan officers with different forms of compensation that were derived in part from the interest rates of the loans they closed. The company sought to mask this interest-rate-based compensation by filtering it through so-called “employee-expense accounts.”
Read the full proposed CFPB Consent Order >>

June 2, 2015 – Deficient BSA/AML Compliance Program
State Street Corp. was ordered by the FRB to revamp its compliance programs after deficiencies were found related to internal controls, customer due diligence procedures, and transaction monitoring. According to the agreement, State Street will be required to submit written plans detailing how it will strengthen Board oversight of its compliance program, boost its customer due diligence procedures, and ensure compliance with the Bank Secrecy Act and anti-money-laundering requirements where deficiencies were found. The bank will also bring on an independent firm to review account and transaction data to see if State Street properly managed suspicious activity. 
Read the full FRB written agreement >>

May 29, 2015 – Non-Compliance with the Servicemembers Civil Relief Act (SCRA)
The OCC assessed a $30 million civil money penalty against Bank of America and ordered remediation to approximately 73,000 affected customer accounts. The OCC took the actions against the bank for violations of law and unsafe or unsound practices in connection with the bank’s non-home loan compliance with the Servicemembers Civil Relief Act (SCRA) and unsafe or unsound practices in connection with non-home debt collection litigation practices. The enforcement action directed the bank to improve its SCRA compliance policies and procedures for determining whether military personnel are eligible for requested SCRA-related benefits, for ensuring that the bank calculates the SCRA benefits correctly, and for verifying the military service status of servicemembers prior to seeking or obtaining default judgments on non-home loans.  The enforcement action also directed the bank to improve its enterprise-wide compliance risk management program.
Read the full OCC press release >>

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