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Regulatory Update - October 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
October 29, 2015 – Federal Reserve Board Issues Federal Open Market Committee Statement
Since the Federal Open Market Committee (FOMC) met in September, information suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates and the housing sector has improved further, Meanwhile, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. To support continued progress toward maximum employment and price stability, the Committee reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market.
Read the full FRB press release >>

October 23, 2015 – CFPB Statement Regarding RushCard Prepaid Card Incident
CFPB Director Richard Cordray issued a statement in response to the RushCard situation, a prepaid card owned by UniRush LLC, in which many consumers have indicated that they have been unable to access funds in their accounts for more than a week. The Director noted “The CFPB is taking direct action to get to the bottom of this situation that may have harmed thousands of innocent consumers already.”  Further, he noted that “the CFPB is prepared to use all appropriate tools at [its] disposal to help ensure that consumers obtain the relief that they deserve.”
Read the full CFPB press release >>

October 22, 2015 – FDIC Board Approves Joint Final Rule on Swap Margin Requirements
The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved a final rule to establish margin requirements for swaps that are not cleared through a clearinghouse. The action is a joint final rule with the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Farm Credit Administration, and the Federal Housing Finance Agency and will apply to entities supervised by these agencies that register with the Commodity Futures Trading Commission (CFTC) or Securities and Exchange Commission (SEC) as a dealer or major participant in swaps. The joint final rule was developed in consultation with the CFTC and the SEC, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act required the agencies to impose margin requirements to help ensure the safety and soundness of swap dealers in light of the risk to the financial system associated with non-cleared swaps activity. The final rule takes into account the risk posed by a swap dealer's counterparties in establishing the minimum amount of initial and variation margin that the covered swap entity must exchange with such counterparties.
Read the full FDIC press release >>

October 22, 2015 – FDIC Board Adopts Proposed Rule to Increase Deposit Insurance Fund To Statutorily Required Level
The Board of Directors of the FDIC adopted a proposal to increase the Deposit Insurance Fund (DIF) to the statutorily required minimum level of 1.35 percent. As part of the Dodd-Frank Act, Congress increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15 percent to 1.35 percent and required that the ratio reach 1.35 percent by September 30, 2020. Further, the Dodd-Frank Act also made banks with $10 billion or more in total assets responsible for the increase from 1.15 percent to 1.35 percent. The approved proposed rule would impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the reserve ratio would likely reach 1.35 percent after approximately two years of payments of the proposed surcharges.
Read the full FDIC press release >>

October 22, 2015 – CFPB Director Addresses the Consumer Advisory Board
CFPB Director Richard Cordray addressed the Consumer Advisory Board to discuss “mandatory pre-dispute arbitration clauses” and their role in resolving consumer disputes. The CFPB’s proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.
Read the full CFPB press release >>

October 19, 2015 – CFPB Monthly Complaint Snapshot Spotlights Credit Card Complaints
The CFPB released its latest monthly consumer complaints snapshot, which highlights credit card complaints. Consumers’ most frequent credit card-related complaints included incurring late fees and credit report problems due to confusing payment processing schedules and difficulty disputing bill inaccuracies. This month’s complaint snapshot also highlights trends seen in complaints coming from the Chicago metro area. As of Oct. 1, 2015, the CFPB has handled more than 726,000 complaints across all products.
Read the full CFPB press release >>

October 19, 2015 – FRB Governor Addresses Opportunities for Reducing Regulatory Burdens on Community Banks
At the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Outreach Meeting in Chicago, Governor Lael Brainard spoke about identifying opportunities for reducing regulatory burdens on community banks, highlighting those areas that hold the greatest promise to reduce undue regulatory burden, especially for community banks. Such areas include regulatory reports, the small bank holding company policy threshold, the Community Reinvestment Act, Bank Secrecy Act and anti-money laundering, appraisal thresholds, stress tests for regional banks and the Volcker Rule.
Read the full FRB press release >>

October 19, 2015 – FDIC Chairman Remarks for Reducing Regulatory Burden
At the EGRPRA Outreach Meeting in Chicago, FDIC Chairman, Martin Gruenberg, remarked upon the FDIC’s regulatory review process for EGRPRA. The Chairman discussed emerging themes including an interest from participants that regulators consider whether laws and regulations based on longstanding thresholds should be changed, requests that supervisory expectations intended for large banks are not applied to community banks, and requests that regulators have open and regular lines of communication with community bankers. The Chairman emphasized that the FDIC intends to continue to look for ways to reduce or eliminate outdated or unnecessary requirements during the review process, rather than addressing concerns at the very end.
Read the full FDIC press release >>

October 19, 2015 – Comptroller of the Currency Discusses Regulatory Burden Relief
In a speech at the Interagency Outreach Meeting on EGRPRA, the Comptroller of the Currency, Thomas Curry, commented on reducing unnecessary regulatory burden on community banks. Curry acknowledged that smaller banks and thrifts don’t have the same kind of resources that large institutions can bring to bear on regulatory compliance and noted that if regulators can eliminate unnecessary rules and streamline others, it will be easier for these institutions to serve the economic needs of their communities.
Read the full OCC bulletin >>

October 2, 2015 – OCC Releases Quarterly Report on Mortgage Performance
Second quarter 2015 data from eight national banks showed first-lien mortgages continued to improve from a year ago, according to the OCC’s quarterly report on mortgage performance. The OCC Mortgage Metrics Report, Second Quarter 2015, showed 93.8 percent of mortgages included in the report were current and performing at the end of the quarter, compared with 92.9 percent a year earlier. The percentage of mortgages that were 30 to 59 days past due was 2.2 percent of the portfolio, a 7.9 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 16.0 percent decrease from a year earlier. Foreclosure activity among the reporting servicers also declined from a year ago. The number of mortgages in the process of foreclosure at the end of the second quarter of 2015 was 299,500, a decrease of 23.5 percent from a year earlier.
Read the full OCC Mortgage Metrics Report >>

October 2, 2015 – CFPB Sends Industry Letter on 'Know Before You Owe' Mortgage Disclosure Rule Compliance
The CFPB sent a letter to mortgage industry trade groups regarding the Know Before You Owe mortgage disclosure rule, which became effective on October 3. The rule, also called the TILA-RESPA Integrated Disclosure rule, requires easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a borrower. As the letter states, the mortgage industry has needed to make significant systems and operational changes to adjust to the requirements of the rule, and that implementation requires extensive coordination with third parties. During initial examinations for compliance with the rule, the CFPB’s examiners will evaluate an institution’s Compliance Management System and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance. Examiners will expect supervised entities to make good faith efforts to comply with the rule’s requirements in a timely manner. Specifically, examiners will consider: the institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff; and, its handling of early technical problems or other implementation challenges.
Read the full CFPB press release >>

REGULATORY GUIDANCE
October 29, 2015 – Office of Financial Research Working Paper on Regulatory Arbitrage in Repo Markets
The Office of Financial Research (OFR) released a working paper documenting a pattern of foreign-owned broker-dealers reducing their borrowing in the U.S. triparty repo market at quarter end and immediately returning to the market when a new quarter begins. This activity serves as a key source of short-term funding in the financial system for these broker-dealers by reducing their capital requirements under the leverage ratio.
Read the full OFR Working Paper >>

October 27, 2015 – Floor Plan Lending: Revised Comptroller's Handbook Booklet
The OCC issued the “Floor Plan Lending” booklet of the Comptroller’s Handbook. This revised booklet updates and replaces the “Floor Plan Loans” booklet issued in March 1990 (and examination procedures issued in May 1998) as well as section 216, “Floor Plan and Indirect Lending,” issued in January 1994 as part of the former Office of Thrift Supervision Examination Handbook for the examination of federal savings associations. The revised booklet provides examiners with an overview of the floor plan lending business, associated risks, and sound risk management practices. The booklet also provides examiners with expanded examination procedures and tools to use during supervisory activities that focus on this type of lending.
Read the full OCC Bulletin >>

October 23, 2015 – FDIC Holds Industry Teleconference Concerning Cybersecurity
President Obama designated October as National Cybersecurity Awareness Month to raise awareness of both threats to the technologies that have become part of our everyday lives and the need to proactively defend our digital landscape. In recognition of this important designation, the FDIC hosted an informational call for FDIC-supervised institutions to address and discuss the FDIC’s regulatory expectations regarding cybersecurity preparedness.
Read the full FDIC press release >>

October 21, 2015 – Comptroller of the Currency Discusses OCC Areas of Focus
In a speech to the Exchequer Club, the Comptroller of the Currency, Thomas Curry discussed credit risk and his vision of transparency and accountability within the industry. Curry stated that focus is, and will be, on the issues that are most important to the OCC: operational risk, reserve releases, HELOCs, leveraged lending, credit underwriting, concentrations, subprime auto, cybersecurity, and heightened expectations for large bank risk management and director engagement. Curry noted, given the trends in underwriting and risk selection, we should be asking whether banks have the appropriate risk management processes and structures in place to measure, monitor, and control the increased credit risk they are taking on.
Read the full OCC Bulletin >>

October 20, 2015 – OFR Working Paper Explores Literature on Financial Networks and Interconnectedness
The OFR released a working paper that reviews the rapidly expanding research on network models of the financial system. The working paper focuses on networks of payment obligations between financial firms created through lending, derivatives transactions, and other financial contracts. These connections can allow beneficial transfer of risk and capital allocation. But the same connections also create channels for shocks to spread from one part of the financial system to others. The paper reviews research analyzing the balance between these conflicting effects and finds that the potential for contagion depends on network structure and factors such as the size, leverage, and asset quality of individual financial institutions.
Read the full OFR Working Paper >>

October 15, 2015 – CFPB Finalizes Rule to Improve Information About Access to Credit in the Mortgage Market
The CFPB finalized a rule to improve information reported about the residential mortgage market. The rule will shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulation. The Bureau is working with other federal agencies to streamline the reporting process for financial institutions. “The Home Mortgage Disclosure Act helps financial regulators, the public, housing officials, and even the industry itself keep a watchful eye on emerging trends and problem areas in the nation’s mortgage market – the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “With today’s final rule we are shedding more light to foster better understanding of the market, and also ensuring that lenders have sufficient time to come into compliance.”
Read the full CFPB press release >>

October 14, 2015 – FFIEC Releases Spanish Translation of the 2014 Bank Secrecy Act/Anti-Money Laundering Examination Manual
The FFIEC Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual (Manual) has been translated into Spanish and is now available to the public. The FFIEC released the 2014 update of the Manual on December 2, 2014. The revised Manual reflects the FFIEC's ongoing commitment to incorporate guidance issued since 2010 into one manual for the FFIEC agencies' examination staff.
Read the full FDIC press release >>

October 8, 2015 – CFPB Provides Guidance About Marketing Services Agreements

The CFPB issued a bulletin providing guidance to the mortgage industry regarding marketing services agreements. The bulletin offers an overview of the federal prohibition on mortgage kickbacks and referral fees, and describes examples from the CFPB’s enforcement experience as well as the risks faced by lenders entering into these agreements. During the course of supervising mortgage lenders and enforcing federal law, the CFPB has found that marketing services agreements carry legal and regulatory risk for lenders. The bulletin explains that while marketing services agreements are usually framed as payments for advertising or promotional services, in some cases the payments are actually disguised compensation for referrals. Any agreement that entails exchanging a thing of value for referrals of settlement service business likely violates federal law, regardless of whether a marketing services agreement is part of the transaction. The bulletin also describes a number of legal violations the
CFPB has encountered in investigations involving kickbacks and referral fees.
Read the full CFPB Bulletin >>

October 7, 2015 – Office of Financial Research Working Paper Highlights Challenges in Interpreting the Liquidity Coverage Ratio
An OFR working paper illustrates some of the complexities in interpreting the Liquidity Coverage Ratio (LCR), a new standard set by bank regulators after the financial crisis to help ensure banks maintain enough liquid assets to cover their financial obligations during times of stress. The working paper uses a series of increasingly complex examples to demonstrate differences in LCRs computed under the Basel and U.S. standards. These examples demonstrate issues to consider when analyzing this new liquidity metric.
Read the full OFR Working Paper >>

October 2, 2015 – FDIC Provides Supervisory Expectations for the Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure Rule
The FDIC has published guidance on its initial supervisory expectations in connection with its examinations of financial institutions for compliance with the Truth in Lending Act (TILA) – Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID Rule), which became effective October 3, 2015.  The FDIC's supervisory approach regarding the TRID Rule will be similar to the approach the FDIC took in initial examinations for compliance with the Ability-to-Repay/Qualified Mortgage rules that became effective in January, 2014.  Examiners will expect supervised entities to make good faith efforts to comply with the TRID Rule's requirements in a timely manner.
Read the full FDIC press release >>

RECENT ENFORCEMENT ACTION ACTIVITY
October 29, 2015 – CFPB Takes Action Against Two of the Largest Employment Background Screening Report Providers for Serious Inaccuracies
The CFPB has taken action against two of the largest employment background screening report providers for failing take basic steps to assure the information reported about job applicants was accurate. The serious inaccuracies reported by General Information Services (GIS) and its affiliate, e-Background-checks.com, Inc. (BGC), potentially affected consumers’ eligibility for employment and caused reputational harm. The CFPB found that GIS and BGC violated the Fair Credit Reporting Act by, among other things, failing to employ reasonable procedures to assure the maximum possible accuracy of the information contained in reports provided to consumers’ potential employers. The CFPB is ordering the companies to correct their practices, provide $10.5 million in relief to harmed consumers, and pay a $2.5 million civil penalty
Read the full CFPB press release >>

October 29, 2015 – CFPB Takes Action Against Nationwide Student Financial Aid Scam
The CFPB has filed a complaint in federal court against Global Financial Support, Inc., a California corporation owned by Armond Aria that operates under the names of College Financial Advisory and Student Financial Resource Center.  The complaint accuses the company of a nationwide student financial aid scam that allegedly ripped off tens of thousands of students and families across the country by illegally charging millions of dollars in fees for sham financial services. The CFPB is seeking to halt illegal practices and obtain relief for harmed consumers.
Read the full CFPB press release >>

October 27, 2015 – CFPB Orders Servicemember Auto Loan Company to Pay $3.28 Million for Illegal Debt Collection Tactics
The CFPB filed an administrative order against Security National Automotive Acceptance Company (SNAAC), an auto lender specializing in loans to servicemembers, for engaging in illegal debt collection practices. The order requires the company to refund or credit about $2.28 million to servicemembers and other consumers who were allegedly harmed, and pay a penalty of $1 million. A separate court order bans SNAAC from using aggressive tactics, such as exaggeration, deception, and threats to contact commanding officers, to coerce servicemembers into making payments. “Security National Automotive Acceptance Company must refund or credit its customers $2.28 million for coercing money out of them using illegal debt collection practices,” said CFPB Director Richard Cordray. “Servicemembers should not be forced to pay because a debt collector used deceptive pressure tactics.”
Read the full CFPB press release >>

October 26, 2015 – SEC Charges Credit Rating Agency With Misrepresenting Surveillance Methodology
The SEC charged credit rating agency DBRS, Inc. with misrepresenting its surveillance methodology for ratings of certain complex financial instruments during a three-year period.  An SEC investigation found that the firm misrepresented it would monitor on a monthly basis each of its outstanding ratings of U.S. residential mortgage-backed securities (RMBS) and re-securitized real estate mortgage investment conduits (Re-REMICs) by conducting a three-step quantitative analysis and subjecting each rating to review by a surveillance committee. The firm agreed to pay nearly $6 million to settle the charges.
Read the full SEC press release >>

October 22, 2015 – SEC Announces Enforcement Results For Fiscal Year 2015
The SEC announced that in fiscal year 2015, it continued to build a strong record of first-of-their-kind cases that spanned the spectrum of the securities industry. In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.  Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders. The agency’s first-of-their-kind cases included the first action involving: a private equity adviser for misallocating broken deal expenses; an underwriter for pricing-related fraud in the primary market for municipal securities; a “Big Three” credit rating agency; violations arising from a dark pool’s disclosure of order types to its subscribers; an FCPA action against a financial institution; an admissions settlement with an auditing firm; and an SEC rule prohibiting the use of confidentiality agreements to impede whistleblower communication with the SEC.
Read the full SEC press release >>

October 1, 2015 – CFPB Issues Enforcement Action for Illegal Debt Collection Tactics
The CFPB announced an enforcement action against an indirect auto finance company and its auto title lending subsidiary for pressuring borrowers using illegal debt collection tactics. The CFPB found that Westlake Services, LLC and Wilshire Consumer Credit, LLC deceived consumers by calling under false pretenses and using phony caller ID information, falsely threatened to refer borrowers for investigation or criminal prosecution, and illegally disclosed information about debts to borrowers’ employers, friends, and family. The CFPB ordered the companies to overhaul their debt collection practices and to provide consumers $44.1 million in cash relief and balance reductions. The companies will also pay a civil penalty of $4.25 million.
Read the full CFPB Consent Order >>

GRANT THORNTON ANNOUNCEMENTS
Industry Hot Topics: The Audit Committee’s Role in Cybersecurity
In an attempt to raise awareness of both threats to the technologies that have become part of our everyday lives and the need to proactively defend our digital landscape, President Obama designated October as National Cybersecurity Awareness Month. With the SEC heightening its scrutiny of organizations’ cybersecurity processes and new technologies also creating new channels for cyberattacks, the need is greater than ever for audit committees to be a more integral part of cybersecurity management efforts. Involving the audit committee after a data breach severely limits its ability to add value to the process and puts the organization at a tremendous disadvantage. Click here for a recently released white paper that focuses on the audit committee’s role in cybersecurity.

Grant Thornton’s Regulatory Center of Excellence offers advisory services to identify and assess the cybersecurity risks that threaten financial institutions. Depending on the institution’s needs, we analyze existing protocols to ensure that these risks are adequately addressed and help develop or enhance the audit program to identify, prevent and respond to cybersecurity threats. Please do not hesitate to contact Grant Thornton for an exploratory conversation to discuss how we may be able to help you enhance your audit committee’s cybersecurity.

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.