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Regulatory Update - September 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
September 29, 2015 – CFPB Director Richard Cordray Testifies Before the House Committee on Financial Services
Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB), testified in front of the House Committee on Financial Services regarding the CFPB’s latest Semi-Annual Report to Congress. Director Cordray’s testimony included reflection on the five years passed since the CFPB was established under the Dodd-Frank Act in addition to the effects of the CFPB’s activities. Director Cordray noted that as a result of the CFPB’s work, consumer financial markets are showing increasing signs of health as evidenced by: an increase in the number of consumers taking out mortgages; an eight percent increase in year-over-year auto loan originations; and a 12 percent year-over-year increase in the number of consumer credit card accounts opened. Additionally, the percentage of loan balances that are seriously delinquent dropped below four percent during the second quarter of 2015 for the first time since 2007.
Read Director Cordray’s full testimony >>

September 29, 2015 – CFPB Concerned About Widespread Servicing Failures Reported by Student Loan Borrowers
The CFPB released a report outlining widespread servicing failures reported by both federal and private student loan borrowers. Consumers describe companies using a wide range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress, and contribute to driving struggling borrowers to default. The CFPB has made it a priority to take action against companies that are engaging in illegal servicing practices, and such ongoing work includes addressing many of the problems outlined in the report. The CFPB also intends to explore potential industry-wide rules to increase borrower protections.
Read the full CFPB Student Loan Servicing report >>

September 28, 2015 – FDIC Vice Chairman Thomas Hoenig Releases Semi-Annual Update of the Global Capital Index
Federal Deposit Insurance Corporation (FDIC) Vice Chairman Thomas Hoenig released the semi-annual update to the Global Capital Index, showing the capital ratios for Global Systemically Important Banks (G-SIB). The Global Capital Index relies on International Financial Reporting Standards (IFRS) to measure a firm's tangible equity (loss-absorbing capital) against a more complete reporting of balance sheet assets. The data shows that for the largest U.S. banking firms, the average tangible equity capital ratio – known inversely as the leverage ratio – is 5.73 percent, meaning that each dollar of assets is funded with approximately 94 cents of borrowed money. Additionally, the largest regional and community banks have tangible capital ratios ranging from 7.58 to 8.92 percent, meaning that they operate with between 1.32 and 1.56 times more funding from their ownership than do G-SIBs.
Read the full Global Capital Index >>

September 28, 2015 – Federal Reserve Board Governor Daniel Tarullo Discusses Capital Regulation Across Financial Intermediaries
In a speech at the Banque de France Conference focused on financial regulation, Federal Reserve Governor Daniel Tarullo discussed capital regulation across financial intermediaries. Governor Tarullo indicated that the Federal Reserve Board (FRB) is preparing to strengthen capital requirements for some large insurance firms, implying that the current rules are not tough enough. Governor Tarullo stated that the scope and nature of a firm's liabilities provide the justifications for capital requirements regulation, and therefore, differences in liabilities can, accordingly, warrant different capital requirements for portfolios of similar assets across firms.
Read Governor Tarullo’s full remarks >>

September 25, 2015 – OCC Releases Fiscal Year 2016 Bank Supervision Operating Plan
The Office of the Comptroller of the Currency (OCC) released its bank supervision operating plan for fiscal year (FY) 2016. The plan provides the foundation for the development of individual bank supervisory strategies and policy initiatives. OCC staff members use this plan to guide their supervisory priorities, planning, and resource allocations. The plan highlights supervisory priorities for Large Bank Supervision, Midsize and Community Bank Supervision, OCC’s National Risk Committee, and the Office of the Chief National Bank Examiner. Supervisory strategies for fiscal year 2016 will focus on: business model and strategy changes; compliance; credit risk and loan underwriting; cybersecurity and resiliency planning; and interest rate risk.
Read the full OCC Fiscal Year 2016 Operating Plan >>

September 22, 2015 – Federal Financial Institutions Examination Council Announces Availability of 2014 Data on Mortgage Lending
The Federal Financial Institutions Examination Council (FFIEC) announced the availability of data on mortgage lending transactions at 7,062 U.S. financial institutions covered by the Home Mortgage Disclosure Act (HMDA). Covered institutions include banks, savings associations, credit unions, and mortgage companies. The HMDA data made available covers 2014 lending activity and includes applications, originations, purchases, and sales of loans, denials, and other actions related to applications. The data released also includes disclosure statements for each financial institution, aggregate data for each metropolitan statistical area (MSA), nationwide summary statistics on lending patterns, and Loan Application Registers (LARs) for each financial institution. The FFIEC prepares and distributes this information on behalf of its member agencies.
Read the full FFIEC press release >>

September 22, 2015 – CFPB Monthly Complaint Snapshot Spotlights Mortgage Complaints
The CFPB released its latest monthly consumer complaints snapshot, which highlights mortgage complaints. According to the report, consumers continue to face problems with mortgage servicing, particularly during certain circumstances, such as when they apply for a loan modification to avoid foreclosure. This month’s snapshot also highlights trends seen in complaints coming from the Denver, Colorado metropolitan area. As of September 1, 2015, the CFPB has handled over 702,900 complaints across all products.
Read the full September 2015 CFPB Monthly Complaint Report  >>

September 21, 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 $5.5 billion in the second quarter of 2015, $2.2 billion lower (28 percent) than in the first quarter of 2015. Trading revenue in the second quarter was $0.9 billion lower (14 percent) than in the second quarter of 2014. Additionally, credit exposures from derivatives fell sharply in the second quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, fell $97 billion (19 percent) to $406 billion.
Read the full OCC Quarterly Report on Bank Trading and Derivatives Activities >>

September 17, 2015 – FDIC Chairman Remarks on Bankruptcy and the Orderly Liquidation Process
Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg delivered a speech to the FDIC Banking Research Conference focused on the progress that 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 market breakdowns that took place during the recent financial crisis. Chairman Gruenberg stated that the Dodd-Frank Act requirement for the largest bank holding companies and designated non-bank financial companies to prepare “living wills” in addition to the powers given to the Orderly Liquidation Authority in managing the orderly failure of a firm help ensure that financial markets and the broader economy can weather the failure of a systemically important financial institution (SIFI). Chairman Gruenberg recommended that firms reduce internal interconnectedness between their legal entities so that critical activities can be maintained under a resolution situation.
Read the Chairman Gruenberg’s full remarks >>

September 17, 2015 – CFPB Releases New Tools as Part of Know Before You Owe Mortgage Initiative
The CFPB released new online tools as part of its Know Before You Owe initiative aimed at helping consumers navigate the mortgage process. The tools provide an interactive, step-by-step overview of the mortgage process, help homebuyers decide how much they can afford to spend, and help consumers explore and use the new Know Before You Owe mortgage forms. Creditors will have to begin providing the new forms on Oct. 3, 2015, making it easier for consumers to understand mortgage options and comparison shop between multiple loan offers.  
Read the full CFPB press release >>

September 8, 2015 – FFIEC Announces Initiative to Streamline Reporting Requirements for Community Banks
The FFIEC detailed steps regulators are taking to streamline and simplify regulatory reporting requirements for community banks and reduce their reporting burden. The objectives of this community bank burden-reduction initiative are consistent with the early feedback the FFIEC has received as part of the regulatory review being conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996. As an initial step by regulators to streamline some reporting requirements, the federal banking agencies, under the auspices of the FFIEC, are seeking comment on proposals to, in part, eliminate or revise several Call Report data items. These changes would not affect credit unions, but would simplify the reporting requirements for banks and savings associations. In evaluating changes to the Call Report, the FFIEC has sought to balance reporting burden against regulators’ need for reliable data to ensure banks and savings associations operate in a safe and sound manner and are able to meet the financial needs of the communities they serve. Individual reporting changes are proposed to take effect with the Call Report submissions for December 2015 or March 2016.
Read the full FFIEC press release >>

September 3, 2015 – Agencies Approve Bank of America to Begin Using Advanced Approaches Framework to Determine Risk-Based Capital Requirements
The FRB and the OCC announced that they have approved Bank of America and its subsidiary national banks to begin using the “advanced approaches” capital framework starting in the fourth quarter of 2015. Under this framework, firms must meet specific risk measurement and risk management criteria when calculating their risk-based capital requirements. The framework implements standards developed by the Basel Committee on Banking Supervision and applies to large, internationally active banking and includes the depository institution subsidiaries of those firms. Before a banking organization may use the advanced approaches framework, it must conduct a satisfactory trial, or “parallel run,” using the framework.  Under the supervision of its regulator, a firm must show it can comply with the framework during the parallel run period for at least four consecutive calendar quarters by using risk measurement and risk management systems that adhere to the advanced approaches framework. Bank of America and its subsidiary national banks have each completed a parallel run and will use the advanced approaches framework to calculate and publicly disclose their risk-based capital ratios beginning in the fourth quarter of 2015.
Read the full joint OCC / FRB press release >>

September 2, 2015 – FDIC Releases 'Quarterly Banking Profile'
The FDIC released its Quarterly Banking Profile featuring financial results for the second quarter of 2015. Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $43 billion in the second quarter of 2015, up $2.9 billion (7.3 percent) from a year earlier and the highest quarterly income on record. The increase in earnings was mainly attributable to a $3.6 billion rise in net operating revenue (net interest income plus total non-interest income). Of the 6,348 insured institutions in the second quarter of 2015, more than half (58.7 percent) reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the second quarter fell from 6.8 percent a year earlier to 5.6 percent, the lowest since the first quarter of 2005.
Read the full FDIC Quarterly Banking Profile >>

REGULATORY GUIDANCE
September 8, 2015 – Department of Defense Issues Final Rule Regarding Military Lending Act
The Department of Defense (DOD) issued a final rule amending the implementing regulations of the Military Lending Act of 2006 (MLA). The final rule expands specific protections provided to service members and their families under the MLA and addresses a wider range of credit products than the DOD's previous regulation. FDIC-supervised institutions and other creditors must comply with the rule for new covered transactions beginning October 3, 2016. For credit extended in a new credit card account under an open-end consumer credit plan, compliance is required beginning October 3, 2017.
Read the FDIC final rule summary >>

RECENT ENFORCEMENT ACTION ACTIVITY
September 28, 2015 – Auto Lending Discrimination and Illegal Credit Card Practices
The CFPB announced two separate actions against Fifth Third Bank for discriminatory auto loan pricing and for illegal credit card practices. The joint CFPB and Department of Justice (DOJ) auto lending enforcement action requires Fifth Third Bank to change its pricing and compensation system to minimize the risks of discrimination and to pay $18 million to harmed African-American and Hispanic borrowers. The CFPB’s action against Fifth Third Bank’s deceptive marketing of credit card add-on products requires the bank to provide an estimated $3 million in relief to eligible harmed consumers and pay a $500,000 penalty.
Read the full CFPB press release >>

September 24, 2015 – Discriminatory Redlining Practices
The CFPB and the DOJ announced a joint action against Hudson City Savings Bank for discriminatory redlining practices that denied residents in majority Black and Hispanic neighborhoods fair access to mortgage loans. The complaint alleges that Hudson City illegally provided unequal access to credit to neighborhoods in New York, New Jersey, Connecticut, and Pennsylvania. The bank located branches and loan officers, selected mortgage brokers, and marketed products to avoid and thereby discourage prospective borrowers in predominantly Black and Hispanic communities. If the proposed consent order is approved by the court, Hudson City will pay $25 million in direct loan subsidies to qualified borrowers in the affected communities, $2.25 million in community programs and outreach, and a $5.5 million penalty. This represents the largest redlining settlement in history to provide such direct subsidies.
Read the full CFPB press release >>

September 9, 2015 – Deceptive Debt Collection Tactics
The CFPB took action against the nation’s two largest debt buyers and collectors for using deceptive tactics to collect bad debts. The Bureau found that Encore Capital Group and Portfolio Recovery Associates bought debts that were potentially inaccurate, lacking documentation, or unenforceable. Without verifying the debt, the companies collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents. The CFPB has ordered the companies to overhaul their debt collection and litigation practices and to stop reselling debts to third parties. Encore must pay up to $42 million in consumer refunds and a $10 million penalty, and stop collection on over $125 million worth of debts. Portfolio Recovery Associates must pay $19 million in consumer refunds and an $8 million penalty, and stop collecting on over $3 million worth of debts.
Read the full CFPB press release >>

September 8, 2015 – Deceptive Credit Card Add-On Product Marketing and Servicing
The FDIC announced a settlement with Comenity Bank and Comenity Capital Bank for deceptive practices related to the marketing and servicing of credit card add-on products in violation of Section 5 of the Federal Trade Commission Act. As part of the settlement, each of the banks stipulated to the issuance of a Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty. Under the FDIC orders, Comenity Bank will pay a civil money penalty of $2 million and provide restitution of approximately $53 million to harmed consumers. Comenity Capital Bank will pay a civil money penalty of $450,000 and provide restitution of approximately $8.5 million to harmed consumers. The FDIC determined that the banks violated Section 5 by, among other things:
  • Representing to consumers that they would not be charged a fee for the add-on products if their accounts had no balances, but still charging fees to consumers in those circumstances.
  • Making material misrepresentations and omissions regarding the refund process applicable to consumers' cancellations of the add-on products within the first 30 days of enrollment.
  • Making material misrepresentations and omissions regarding the conditions for receipt of the gift cards or account statement credits offered as incentives for enrolling in the add-on products.
Read the full Comenity Capital Bank Consent Order >>
Read the full Comenity Bank Consent Order >>

GRANT THORNTON ANNOUNCEMENTS
Industry Hot Topics: Fair Lending
With the rise of the CFPB and the increased emphasis on consumer compliance issues under the Dodd-Frank Act, fair lending regulatory requirements have expanded, creating a complex and often uncertain compliance environment for financial institutions. Ever-evolving regulatory requirements mandating fair, transparent, and competitive access to consumer credit have forced financial institutions to comprehensively examine their underwriting, pricing, marketing, sales, and servicing practices to ensure fair lending.

Grant Thornton’s Regulatory Center of Excellence offers advisory services to help institutions develop sound, transparent fair lending compliance programs. Depending on the institution’s needs, we analyze the existing product and service portfolio to help develop or enhance the fair lending compliance program in place to mitigate risk and identify potential focal points for compliance examinations. Whether an institution is in the process of developing its fair lending compliance program, preparing for an examination, or enhancing its current fair lending compliance program as a result of an examination, Grant Thornton is here to assist at all stages. Please do not hesitate to contact Grant Thornton for an exploratory conversation to discuss how we may be able to help you enhance your current fair lending compliance program.

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.