Banking Law Prof Blog

What Happens to Restructured Loans and Bank Capital

One-to-four-family mortgage loans usually have a risk-weighting of 50% for purposes of calculating a bank's capital requirements.  Once they're restructured, they receive a risk-weighting of 100%.  Banks suddenly need a lot more capital to balance these assets that have been recognized as riskier. 

What has really changed?  Well, nothing about the loans.  They carried just as high a risk of default one minute before restructuring as they do one minute after, but the impact on the amount of capital required can be quite significant!  Some of the biggest banks won't be able to do this without a capital infusion from somewhere.  Let's see, where to find more capital . . . .

Oh, I know, we'll change the rules about risk-weighting.  We'll let the restructured loans keep their previous risk-weighting, "so long as the loan continues to meet other prudential criteria."

Link to Interim Final Rule:  http://www.occ.treas.gov/ftp/bulletin/2009-22.html

(ag) July 12, 2009, in Capital, Lending Issues, Federal Banking Agencies, Economy

When Agencies Combine: Lessons from the Federal Housing Finance Agency

It's been a year since GSE oversight was reconfigured.  Previously, the Department of Housing and Urban Development (HUD) was responsible for affordable housing goals for Fannie Mae and Freddie Mac, while Office of Federal Housing Enterprise Oversight was responsible for their safety and soundness.  Now the Federal Housing Finance Agency combines both functions.

So what lessons from this reorganization can transfer to the current discussion of financial institution regulatory reform?

1,  Some commentators believe that the separation of authority for safety and soundness from the housing mission of the GSEs exascerbated their problems because of a disconnect in information and a lack of coordinated oversight.  When we think about stripping the existing federal banking agencies of their consumer protection function and giving it to an entirely new, completely separate agency, we might want to think twice in light of the GSE experience.

2.  Others believe that the move to consolidate and strengthen regulation for Fannie Mae and Freddie Mac came too late.  The message here might be for Congress to move forward expeditiously with the current regulatory reform legislation.

Check out the July 8, 2009, American Banker article by Steven Sloan, "In Finance Agency's Birth, a Lesson for Obama Plan."

(ag) July 8, 2009, in Regulatory Reform, Federal Banking Agencies, Economy 

Analyzing the Consumer Financial Protection Agency Act of 2009

      On June 30, 2009, the administration delivered to Congress legislation which provides details behind the broad Financial Regulatory Reform White Paper.  The draft “Consumer Financial Protection Agency Act of 2009” raises many critical issues, including:

 

•  Mission and Scope of Authority.   The CFPA’s broad mission is to protect consumers of all types of financial products and services.  This represents an effort to regulate unregulated financial institutions, to centralize consumer financial protection so as to minimize inconsistencies in regulation, and to address the reality that consumer protection issues have been marginalized by agencies with other responsibilities such as safety and soundness.

      A key concern here is whether consumer financial protection regulation can or should be compartmentalized.  Prudential regulation, which emphasizes financial solvency, must take account of the consumer protection performance of a financial institution to insure long-term viability.   Safety-and-soundness and consumer protection have long been regarded by the best bank regulators as complementary rather than contradictory.

A positive aspect of the proposal is the regulation of previously unregulated providers of financial products and services.  This is long overdue.  Had all mortgage brokers and lenders been subject to a level playing field of consumer protection oversight, many of the abuses leading to the subprime mortgage meltdown might have been controlled. 

      
• Composition of the new CFPA Board.  The five-member governing Board will include four public members appointed by the President and confirmed by the Senate as well as the Director of the National Bank Supervisor, another new agency combining the responsibilities of the Office of the Comptroller of the Currency (“OCC”) and the Office of Thrift Supervision (“OTS”).  One can question whether the new national bank regulator is given a disproportionate voice at CFPA, with only “consultation” to be provided by State regulators, the FDIC, and the Federal Reserve.

• Staffing.  Each of the existing federal bank regulatory agencies will transfer its current consumer protection division to the CFPA.  This proposal assures expertise and minimizes start-up time for the new agency.  The greatly expanded jurisdiction over new entities, products, and services will, however, require the new agency to recognize and allocate staff resources among at least three models for regulation.  I describe these as:  1.  “examination-driven” regulation, which is highly staff intensive because it is based on periodically scheduled on-site visitation;                     2.  “complaint-driven” regulation, which is less staff intensive and less comprehensive because it calls for regulatory attention only when triggered by a certain level of consumer complaints; and 3.  “report-driven” regulation,  like the current review of Home Mortgage Disclosure Act (“HMDA”) data by the Federal Reserve Board which analyzes information required to be submitted and produces a report lagging real time by almost two years. 

• Funding.  The Plan outlined in the White Paper calls for the CFPA to be “independent” of the industries it regulates.  As background, the existing federal banking agencies are funded, not through taxpayer monies but through charter fees and assessments raised from the entities they regulate.  This provides a perverse incentive for agencies to compete with each other to provide the most favorable, least restrictive regulation in order to increase the number and size of institutions they regulate.  “Captive” regulators have marketed their charters as a way to escape consumer protection statutes. 

Details provided in the draft legislation call for the agency to be funded through Congressional  appropriation, authorizing Congress to say how much the agency can spend; however, the legislation goes on to provide that the CFPA shall recover the amount of funds expended through collection of annual fees or assessments on covered entities.  Will continuing the practice of funding a regulatory agency from its regulated constituents result in “capture” of this new agency?

• Clarification of Federal Preemption.  The proposed legislation reestablishes balance between State and federal authority over consumer protection.  States are expressly permitted to enact and enforce consumer protection laws that are more stringent than federal laws.

The 2007 Supreme Court decision in Watters v. Wachovia would be overturned by making State consumer protection laws applicable to national banks and their operating subsidiaries to the same extent that they apply to state banks.  State consumer protection laws are declared not inconsistent with federal law and thus not preempted if they afford consumers greater protection than federal law, making federal consumer protection laws “the floor rather than the ceiling.” 

Industry representatives are sure to complain that the result will be fifty different state standards which will increase the costs of financial products and inhibit innovation.  These arguments must be judged in light of the high costs to all consumers and to our economy which resulted from aggressive preemption of state consumer protection laws.  Large nationwide financial institutions have the capability to research and coordinate legal requirements as they did prior to 2004 when the pace of federal preemption as a means of escaping state consumer protection laws accelerated.

The 2009 Supreme Court decision in Cuomo v. Clearing House Association is affirmed with language defining “visitorial powers” of the national bank regulator.  State attorneys general are expressly authorized to bring lawsuits to require national banks to produce records for investigations into violations of State consumer laws and to enforce any applicable federal or State law.

•  Establishment of a Victims Relief Fund.  Providing that civil money penalties will go into a fund available for restitution rather than into general revenue is a positive step. 

• Weighing Costs and Benefits of Regulation.  CFPA must, in the exercise of its rulemaking authority, consider potential benefits and costs to consumers and regulated entities.  Troubling language in the statute provides that CFPA may not declare a consumer financial product or service unlawful unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  Under this standard, “teaser rate” mortgages would not be unfair to consumers who could avoid injury by refusing the loan. 

 

(ag) July 1, 2009, in Congress, Economy, Federal Banking Regulators, Federal Preemption

What Bankers Are Complaining About

The FDIC has posted its Ombudsman's Report:

http://www.fdic.gov/regulations/resources/ombudsman/feedback/message0409.html

(ag) May 25, 2009 in Federal Banking Agencies/FDIC

More Stress (Testing)

Here's a comment from the Conference of State Bank Supervisor's Newsletter:

Closing Comment
"If we want to heal our financial system so it can resume the business of financing the economy, the Treasury and the White House need to get out of the way and return the authority for bank supervision to the professionals at the independent banking agencies." - William M. Isaac, the former chairman of the Federal Deposit Insurance Corp., writing about the stress tests and accompanying press coverage and publicity in the May 6 issue of American Banker.

-- and I say AMEN!

In addition, CSBS summarized the stress testing results by entity, as follows:

"The capital buffer for each BHC is sized to achieve a Tier 1 risk-based ratio of at least 6 percent and a Tier 1 common risk-based ratio of at least 4 percent at the end of 2010. The report found that all the institutions had sufficient Tier 1 capital at the end of 2010 in the worse case scenario, but 10 firms need to augment their Tier 1 common capital. In total, the regulators estimated the firms needed to add $74.6 billion to their capital buffers. The nine firms that do not need to supplement their capital are: American Express, BB&T, The Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., MetLife Inc., State Street Corp. and U.S. Bancorp. Those needing to add capital are Bank of America -- $33.9 billion, Wells Fargo & Company -- $13.7 billion, GMAC LLC -- $11.5 billion, Citigroup -- $5.5 billion, Regions Financial Corp. -- $2.5 billion, SunTrust Banks Inc. -- $2.2 billion, Key Corp – $1.8 billion, Morgan Stanley -- $1.8 billion, Fifth-Third Bancorp -- $1.1 billion, PNC Financial Services Group -- $600 million."

(ag) May 8, 2009, in Capital, Federal Banking Agencies

How to Get Out of TARP

It's not just a matter of giving back funds received from the Troubled Asset Relief Program (TARP).  Banks that want to exit the TARP program must also demonstrate ability to raise private funds without a guarantee from the FDIC.  The FDIC guarantee has allowed banks to issue debt securities with a lower interest rate, providing a lower cost of funds.  Without that government backing, a bank's ability to raise funds in the private sector is entirely dependent on the public perception of that institution's financial soundness.

Here's a link to today's Wall Street Journal online article by Deborah Solomon and Damian Paletta, "Condition is Set for Banks' TARP Exit":  http://online.wsj.com/article/SB124156005555589031.html

(ag) May 6, 2009, in Capital, Economy, Federal Banking Regulators

Committee on Capital Markets: How to Reorganize the U.S. Financial Regulatory Structure

The Committee on Capital Markets Regulation has released its "Recommendations for Reorganizing the U.S. Financial Regulatory Structure."

The key point is that there should be only two (or at most three) independent regulators for the U.S. financial system:  1.  The Federal Reserve;  2.  A newly-created independent U.S. Financial Services Authority; and  3.  "Possibly another new independent investor/consumer protection agency.

Some concerns about these recommendations:

1.  Britain's FSA demonstrates that this model has its own problems.

2.  What about FDIC?

3.  What about the states' role in chartering and regulating half of the dual banking system and what about the states' role in consumer protection?

We can expect the issue of regulatory restructuring to come before Congress sometime this spring.  This report and the Treasury's Blueprint for a Modernized Regulatory Structure highlight the need for more extensive input on the issue. 

Link:  http://www.capmktsreg.org/press.html

(ag) Wednesday, January 28, 2009, in Federal Banking Agencies

Call for Papers - Treasury's Blueprint for a Modernized financial Regulatory Structure

Download u_of_m_call_for_papers.doc

The University of Memphis Cecil C. Humphreys School of Law announces a call for papers relating to the Treasury's Blueprint for a Modernized Financial Regulatory Structure.  This is a very timely opportunity!

(ag) May 23, 2008, in Federal Banking Agencies

Revamping the US Financial Institution Regulatory System

Everyone's in the midst of reviewing the Paulson Report but here's a viewpoint we don't see adequately expressed in that report:  How does federal agency dependence on charter revenue and the power that flows from number and asset size of entities regulated influence the quality of regulation?

Check out Ed Mierzwinski's Blog.  He's with the U.S. Public Interest Research Group.  He says that his inspiration for this graphic was "March Madness" -- or maybe it was subprime madness.

Ed's representation of federal regulator as industry cheerleader: 

Link to Ed's blog:  http://static.uspirg.org/consumer/archives/2008/03/former_occ_bank.html

(ag) April 3, 2008, in Federal Banking Agencies

Treasury's Blueprint for Regulatory Reform

Today, Treasury Secretary Henry Paulson announced the much anticipated "Blueprint for Regulatory Reform."  Good news:  Secretary Paulson recognized that "Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved.  With few exceptions, the recommendations in this Blueprint should not and will not be implemented until after the present market difficulties are past."  Another reason not to expect quick adoption is that Congress must vote on the plan -- and that's not likely to happen before the Presidential election next fall.  As you can tell, I'm not a big fan of rushing into big regulatory changes that follow too closely on the heels of a national crisis.  That's because I've seen what usually happens.  Two words:  Sarbanes Oxley.  Two more words:  Unintended consequences.

Highlights of the Plan:
1.  The Federal Reserve becomes the "Market Stability Regulator," replacing its more limited role of bank holding company supervisor.  The Federal Reserve would have authority to gather information from commercial banks, investment banks, insurance companies, hedge funds, commodity pool operators -- but not to focus on the "health" of any particular organization, just the impact on "overall financial stability."

2. All federal bank charters would be combined into one charter and all federal bank regulators would be combined into one "Prudential Financial Regulator," with a role similar to the Office of the Comptroller of the Currency (just change the name & keep the current OCC staff would be my guess -- although the OTS says it's not going down without a fight).

3.  A new "Business Conduct Regulatory" is part of the proposal, to achieve greater consistency across product lines, including consumer protection, disclosures, business practices, chartering and licensing & enforcement.

The Plan supports "objectives based regulation, a flexible framework that fosters and embraces innovation." That part of the plan should be hard to swallow in light of the current debacle spurred in part by innovation such as teaser-rate ARMs and Bear-Stearns-like insurance swaps.  On the other hand, we don't want strict regulation for its own sake alone.

Near Term Recommendations include:
1.  Enhancement of the President's Working Group on Financial Markets to include all federal financial regulators, with a mission to coordinate the U.S. regulatory community, mitigate systemic financial risk, enhance financial market integrity, promote consumer and investor protection, and support capital markets efficiency and competitiveness -- a tall order! One wonders what sort of powers will accompany that charge.

2.  Creation of a new Mortgage Origination Commission, although states will retain some authority for regulating mortgage origination practices -- unless, of course, they are preempted.      

Intermediate Term Recommendations: 
1.  New oversight for the payment and settlement systems, headquartered in the Federal Reserve.
2.  Merger of the SEC and CFTC.
3.  New Optional Federal Charter for Insurance -- replacing states as primary regulator for insurance for over 135 years.
4.  Revocation of the Federal Thrift Charter.

Secretary Paulson likens this proposal to the 1991 "Green Book" which eventually resulted in passage of the Gramm-Leach Bliley Act.

Link:  http://www.treas.gov/news/index1.html

(ag) March 31, 2008, in Federal Banking Agencies

Let's Not Be Hasty

An interesting article in the American Banker for April 26, 2008, is entitled "Financial Execs Urge Rapid Regulatory Reform." Well, let's see what this is about!  Representatives of the Financial Services Roundtable (with membership comprising the 100 largest integrated U.S. financial firms) say they would like to see a single federal regulator as an option for financial firms AND a regulatory system based on broad principles and prudential oversight.  The article suggests that the Bear Stearns collapse has triggered these proposals, that they will enable regulators to respond to similar crises more expeditiously, and that they should be adopted post haste. 

Wait a minute:  The Financial Services Roundtable was arguing for a single regulator and more flexible, principles-based regulation long before now.  And most observers believe that we will see Congressional response to the subprime mortgage and financial markets crisis.  Those of us who have seen how heavy-handed Congressional response to crisis can be hope not to see reforms that are rushed through.

(ag) March 27, 2008, in Federal Banking Agencies/Subprime Lending

It's Not Sexy But It's Still an Examination Concern

Flood Insurance continues to be a bank examination issue.  It may not have the pizzazz of complex financial issues, but for those banks doing a traditional lending business and for borrowers seeking plain vanilla home mortgages, it's still important.

The Federal Banking Agencies have issued a Revised Q&A (updated from the 1997 version) to aid compliance.

Link:  http://www.occ.gov/ftp/bulletin/2008-7.html

(ag) March 24, 2008, in Lending Issues/Federal Banking Agencies

Treasury Looks at the Whole Enchilada

The U.S. Treasury Department is seeking comments on 30 issues relating to the U.S. regulatory structure for financial institutions.  This broad study will examine not only insured depository institutions but also insurance and securities companies.  Treasury will submit a comprehensive plan to enhance the global competitiveness of America's capital markets. 

Questions in the request for comment include:

• Key issues that should be addressed in our current regulatory structure
• Whether separate "functional" regulators for banking, insurance, securities and futures continue to make sense
• Whether the U.S. should have a single financial market regulator -- like the U.K., Japan, and Germany
• What the key objectives of financial institution regulation should be
• How government guarantees affect regulation
• Whether we allow sufficiently for market discipline
• Whether regulation of holding companies is appropriate
• Whether we should have "principles-based" regulation or "rules-based" regulation
• How we can improve consumer protection
• What role the States should play
• Whether multiple charters are optimal
• What strengths and weaknesses are demonstrated by the dual banking system
• What the role of a deposit insurer should be
• What the role of the central bank should be
• How we should regulate financial institution subsidiaries
• Whether insurance should be regulated on the federal level
• What regulation is best for securities and futures companies

Comments are due by Nov. 21, 2007.

Link:  http://www.treas.gov/press/releases/reports/federalregisternoticehp602.pdf

(ag) Oct. 12, 2007, in Federal Banking Agencies

Flood Insurance Matters

The Federal Reserve Board assessed a Civil Money Penalty against Orrstown Bank, Shippensburg, PA, for National Flood Insurance Act violations.  Although the fines were $385 per violation as required by the NFIA, for a total of $1,665, this Consent Order indicates that federal bank examiners are focused on flood insurance.  And it's never a good thing to be the recipient of a CMP directive.

Link:  http://www.federalreserve.gov/BoardDocs/Press/Enforcement/2007/20070516/attachment.pdf

(ag) May 16, 2007, in Federal Banking Agencies

Be Careful What You Ask For . . .

It's the old story about the dog chasing the car.  What will he do if he catches it?

The OCC may find itself -- and the other banking agencies -- in a similar quandary as a result of the Watters v. Wachovia decision which exempts operating subsidiaries of national banks from state consumer protection laws.  Congressman Barney Frank, Chairman of the House Financial Services Committee, and Congressman John Dingell, Chairman of the House Energy and Commerce Committee, sent a joint letter dated May 11, 2007, to the federal banking regulators and the Federal Trade Commission, suggesting that if the federal banking agencies don't step up to the plate with stronger consumer protections following the exclusion of the states from this field, Congress may give this authority to the FTC instead of the federal banking agencies.

Link to letter:  http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml

(ag) May 14, 2007, in Consumer Protection, Federal Banking Agencies, Federal Preemption

"Financial Regulation and the Invisible Hand"

Federal Reserve Chairman Ben Bernanke delivered remarks to the NYU Law School yesterday in which he explored "the market-based approach to financial regulation by considering its application to two important--but very different--types of financial institutions: commercial banks and hedge funds. For both types of institutions, market-based regulation has proven an effective supplement to (or substitute for) conventional command-and-control approaches."

Link:  http://www.federalreserve.gov/boarddocs/speeches/2007/20070411/default.htm

(ag) April 12, 2007, in Federal Banking Agencies

2006 HMDA Data Available

The Federal Banking Agencies announced today that the Home Mortgage Disclosure Act (HMDA) data that federally regulated financial institutions are required to submit is now publicly available for the year 2006. 

Expect the number crunchers to analyze this data and draw conclusions about fair lending trends.  For past reporting years, the Federal Reserve has issued its analysis sometime in the summer -- with the caveat that financial institutions are not required to report a number of credit factors, including credit history, debt-to-income ratio, and loan-to-value ratio.  Therefore, the HMDA data will not conclusively prove discriminatory lending practices.

Link:  http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070412/default.htm

(ag) April 12, 2007, in Federal Banking Agencies

Managing Risk: Final Statement on Complex Structured Finance Transactions

The Federal Banking Agencies and the SEC have adopted a Final Statement on Complex Structured Finance Transactions (CSFTs).  The statement will apply to all types of financial institutions, but practically speaking, only the largest ones engage in CSFTs.

The Final Statement focuses on internal controls and risk management procedures tto identify, manage, and address the heightened reputational and legal risks that may arise from elevated risk CSFTs. The Statement does not create any private rights of action.

Link to Jan. 5, 2007, announcement:  http://www.fdic.gov/news/news/press/2007/pr07003.html

(ag) Jan. 6, 2007, in Federal Banking Agencies

Exam Heads Up: Full Compliance Required for FFIEC Authentication Requirements

Examiners will be checking for compliance with the FFIEC Guidelines for Authentication in an Internet Banking Environment which were fully effective Dec. 31, 2006.  Each of the Federal Banking Agencies sent out their own announcements of these new requirements in Oct. 2005 -- plenty of lead-time to implement them, but now the compliance examiners will get serious.  These measures offer additional protection from identity theft for banks and their customers.

Key components of the new requirements:

• Risk assessment
• Customer education
• A statement that single-factor authentication will no longer be adequate for high-risk transactions involving access to customer information or funds transfers.

Link to FFIEC Announcement: http://www.ffiec.gov/press/pr101205.htm

FFIEC Guidance:  http://www.ffiec.gov/pdf/authentication_guidance.pdf

FDIC FIL:  http://www.ffiec.gov/ffiecinfobase/resources/info_sec/2006/fdi-fil-103-2005.pdf

OCC:  http://www.ffiec.gov/ffiecinfobase/resources/info_sec/2006/occ-bul_2005-35.pdf

FRB, OTS, and NCUA have similar announcements.

(ag) Jan. 4, 2007, in Examination, Federal Banking Agencies, Identity Theft, Internet Banking

Countrywide - From a National Bank Charter to a Federal Savings Bank Charter

Countrywide Financial Corp.'s press release dated today announces that it has notified FRB - San Francisco, OCC and OTS of intention to convert from the existing National Bank charter to a Federal Savings bank Charter for its banking operations.  Countrywide Financial Corp. will become a Savings & Loan holding company, also supervised by OTS.  Countrywide notes the efficiency factor in having one regulator and sees the OTS focus on the housing market as more congruent with its strategic plan.

Link: http://www.typepad.com/t/app/weblog/post?blog_id=521417

(ag) Nov. 10, 2006, in Federal Banking Agencies