“An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves.” -- Bill Vaughn
2011 was certainly a year of tremendous challenges. The entire world felt the aftershocks of the recession. Even now, private citizens continue to keep their belts tight, the banking industry struggles both with the economy and regulatory compliance, and policymakers work to keep national and global economies afloat. Despite the obstacles still facing the financial sector, there are some encouraging signs of an ongoing economic recovery. Undoubtedly, many of us watched the clock strike midnight on New Year’s Eve with relief as we closed the books on 2011. Here’s hoping the optimists among us are right and 2012 will be a better year.
2011 YEAR IN REVIEW
The year began as so many new years do: by tying up loose ends and embarking upon new adventures. CSBS and state regulators signed an information sharing memorandum of understanding with the Consumer Financial Protection Bureau (CFPB), thereby forging a new relationship and establishing a foundation of state and federal coordination and cooperation for supervision of providers of consumer financial products and services. Tom Gronstal, former Iowa Superintendent of Banking and then-Chairman of CSBS said the partnership with the CFPB “has very real benefits for providers of financial services. The industry will benefit from the coordinated examinations, consistent procedures and guidelines and improved efficiency.”
The Treasury Department outlined details of its highly anticipated Small Business Lending Fund, which was created by the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.
Many new state bank regulators were appointed, including Peter Bildsten in Wisconsin, Iris Ikeda Catalani in Hawaii, Stephen Kimbell in Vermont, James M. Schipper in Iowa, and Ed Splichal in Kansas. John P. Ducrest, Commissioner of the Louisiana Office of Financial Institutions, became Chairman of CSBS effective January 14. “John is a proven leader among state regulators with a strong commitment to the dual-banking system and the role of the states in financial supervision,” said then CSBS President and CEO Neil Milner.
The Financial Crisis Inquiry Commission, the body charged with examining the financial and economic crisis and explaining its causes, issued its final report. The Commission concluded that the 2008 financial crisis was caused by widespread failures in government regulation, corporate mismanagement, and excessive risk-taking by Wall Street firms. Most notably, the Commission found the crisis was ultimately an avoidable catastrophe. Further, the Commission criticized the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) for preempting state consumer protection laws and hindering state efforts to curb abuses because the agencies were “caught up in turf wars.”
The month closed with a tremendous milestone for supervision of the residential mortgage industry when the federal banking agencies and the Farm Credit Administration announced the Nationwide Mortgage Licensing System and Registry (NMLS) would begin accepting registrations of mortgage loan originators employed by insured depository institutions and their subsidiaries. “The registration of mortgage loan originators is yet another in a long line of significant milestones for NMLS,” said Bill Matthews, Executive Vice President of CSBS. “The Registry not only greatly enhances consumer protection, but also improves state and federal regulation and increases the uniformity of mortgage standards.”
CSBS took public positions on two important policy issues that could potentially negatively impact community banks. First, CSBS submitted views to the Federal Deposit Insurance Corporation (FDIC) on core and brokered deposits as the agency prepared its required study of the issue. CSBS acknowledged that some institutions use brokered deposits to fuel additional risk taking, and that brokered deposits should not be a bank’s principal source of growth. However, CSBS urged the FDIC to develop regulatory solutions to address the elevated risk of brokered deposits, while still permitting the prudent use of this funding channel. Second, CSBS issued a comment letter to the Federal Reserve Board on its notice of proposed rulemaking (NPR) regarding debit card interchange fees and routing. In the letter, CSBS expressed apprehension that the NPR could give rise to significant safety and soundness issues. “We are concerned that the NPR’s response may disproportionately disfavor community banks engaged in debit card issuance, thus raising safety and soundness concerns and potentially driving further consolidation in the banking industry,” wrote Milner.
The Obama Administration released its long-awaited report: “Reforming America’s Housing Finance Market: A Report to Congress.” In the report, the Treasury Department outlined key priorities for the future of housing finance, such as winding down Fannie Mae and Freddie Mac, returning the Federal Housing Administration to its traditional role as a lender of affordable mortgages, and improving coordination among existing government housing finance programs.
Finally, the month ended with another new state bank regulator, as William P. White was appointed to serve as Acting Commissioner of the D.C. Department of Insurance, Securities and Banking while he awaited confirmation, which would occur in June.
March began on a celebratory note as the Alabama Banking Department celebrated its 100th anniversary and Illinois welcomed a new regulator. CSBS offered congratulations to Alabama Superintendent John Harrison and the entire Alabama Banking Department on the epic milestone and 100 years of exemplary service, and welcomed Manuel Flores, who was confirmed to serve as Division Director of the Illinois Division of Banking.
The brokered deposit issue continued to garner attention, as the FDIC held a roundtable meeting to discuss brokered deposit restrictions and other associated regulations. West Virginia Commissioner of Banking Sally Cline represented state financial regulators at the event. The Federal Reserve Board completed the Comprehensive Capital Analysis and Review (CCAR), the cross-institution study of the capital plans of the nation’s largest 19 bank holding companies. As a direct result of the completion of the CCAR, some institutions were allowed to restart or increase dividend payments to shareholders for the first time since February 2009.
Finally, the Congressional Oversight Panel, established by Congress in late 2008 to oversee the $700 billion Troubled Asset Relief Program (TARP), released its 30th and final oversight report in March. The report revealed a number of significant findings: TARP will leave ongoing distortions in the market, public anger towards policymakers, and a lack of transparency and accountability in its wake.
April rushed in, and with it, a flurry of activity from regulators. First, the federal financial regulators issued the proposed credit risk retention rule, better known as the “skin in the game” rule, to require sponsors of asset-backed securities to keep a percentage of the assets as a way to align economic incentives throughout the asset securitization structure. The proposal included an exemption for “qualified residential mortgages.” The FDIC and the Fed also proposed a rule regarding the filing and reporting of resolution plans or “living wills.” The FDIC issued a report outlining how resolution could have been structured for Lehman Brothers under the agency’s orderly liquidation authority, had the Dodd-Frank Act been enacted before Lehman’s collapse. Despite industry efforts to stop its implementation, the Federal Reserve Board’s loan officer compensation rule went into effect. Also, Federal Reserve Chairman Ben Bernanke held the first scheduled press conference in the Fed’s history, explaining the rationale behind the Fed’s management of the economy.
The federal banking agencies also issued formal enforcement orders against the nation’s 14 largest servicers. The orders were based upon a review of the servicers’ foreclosure policies and practices, which found critical weaknesses in servicers’ policies and practices.
Meanwhile, the Treasury Department announced three institutions repaid $7.4 billion in TARP funds. With this repayment, the TARP investment in banks officially turned a profit.
CSBS Chairman and Commissioner of the Louisiana Office of Financial Institutions John P. Ducrest testified on behalf of CSBS before the Financial Institutions and Consumer Protection Subcommittee of the Senate Banking Committee on the state of community banking. In his testimony, Ducrest focused on the essential role community banks play in economic development, addressed the current regulatory environment in which community banks operate, identified concerns about the impact of regulations and policies on community banks, and offered recommendations for policymakers aimed toward strengthening the community banking system.
May opened with CSBS submitting a comment letter to the Federal Reserve Board on its proposed rule amending Regulation Z regarding escrow accounts for higher-priced mortgage loans. CSBS supported the Fed’s proposed exemption for institutions that portfolio mortgage loans, but wrote that the proposed exemption for banks operating in rural or underserved areas is too narrow. CSBS and the National Association of State Credit Union Supervisors also offered support of legislation to delay implementation of the interchange fee provisions of the Dodd-Frank Act.
In response to growing media reports of possible widespread municipal bond defaults, CSBS hosted a series of informational webinars for state examiners. The webinars walked attendees through the risks and unique structures of some municipal debt products to give examiners a better understanding of these traditionally low-risk investments.
CSBS and the American Association of Residential Mortgage Regulators (AARMR) launched the NMLS Mortgage Call Report, marking the first standardized information collection for the residential mortgage industry.
May also saw more new state regulators, as Bret Afdahl in South Dakota, Benjamin Lawsky in New York, and Ronald A. Wilbur in New Hampshire were appointed.
Finally, CSBS selected its board and officers for 2011-2012. Among other appointments, John P. Ducrest began his term as Chairman, after completing the remaining term of Tom Gronstal, William S. Haraf of California was named Chairman-Elect, Greg Gonzales of Tennessee was elected Vice Chairman, Candace Franks of Arkansas was selected to serve as Secretary, Charles Vice of Kentucky entered his second year of a two-year term as Treasurer, and Joseph A. Smith, Jr. of North Carolina continued to serve as Immediate Past Chairman. In his keynote address concluding the CSBS State-Federal Supervisory Forum, Chairman Ducrest spoke on the condition of the state financial system, and detailed that ensuring the continued viability of the community banking system would serve as the primary focus for his tenure as Chairman of CSBS.
Summer rolled into DC, and with it an announcement that state regulators had settled with Mortgage Access Corp., doing business as Weichert Financial Services (MAC). The 10-state settlement saw MAC agreeing to remit a $3 million penalty and adhere to a consent order after an examination found numerous compliance and internal control deficiencies.
CSBS also submitted a letter to the OCC expressing concern regarding the 30-day comment period for the OCC’s proposed preemption regulations implementing the preservation of state law sections of the Dodd-Frank Act. CSBS called for the OCC to extend the comment deadline by 60 days to allow sufficient public deliberation on the legislative, judicial, regulatory and constitutional implications of the proposal. “The OCC has issued a set of preemption regulations that may affect millions of consumers across the country without meaningful consultation with the parties these regulations would affect,” wrote Milner. “A 30-day comment period is unacceptable as a matter of procedure and principle.”
In late June, CSBS followed up with a second comment letter to the OCC on the merits of the proposal itself. As stated in the CSBS comment letter, both the mandate of the Dodd-Frank Act and the intent of Congress are clear on this issue. Congress had undone the OCC’s broad preemption determinations, limited the OCC’s authority in this area going forward, and established the Barnett decision’s “prevent or significantly interfere” standard as the preemption standard for the OCC to apply. “Congress’s rejection of the OCC’s prior approach could not be clearer,” wrote Milner. “Unfortunately, the OCC’s proposed rule violates both Congress’s intent and the plain language of the Dodd-Frank Act.” The New York Financial Services Department also filed a strong letter in opposition to the OCC’s proposal. In an interview with The New York Times, Benjamin Lawsky, the head of the department, said he believed the OCC was trying to “hinder the intent of Dodd-Frank.” Lawsky continued, “We think it’s important for consumers and for the financial service industry writ large for the states to continue their vital role. The importance of the states as regulators has been on display the last several years.” Also, in a surprising turn of events, the Treasury Department sent a letter to the OCC objecting to the proposal, saying the OCC ignored Congressional intent.
Finally, the Fed issued its controversial final debit card interchange rule as required by Dodd-Frank.
Predictably, July saw fireworks in DC. CSBS submitted a comment letter in response to a Federal Reserve proposed rule to implement the Ability to Repay provisions of the Dodd-Frank Act. CSBS supported the requirement that a creditor make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms. The FDIC issued its final study on regulatory treatment of core and brokered deposits. Through the course of its outreach and research, the FDIC heard many concerns from the industry about the brokered deposit statute, but still had serious concerns about brokered deposits. The FDIC concluded that the brokered deposit statute continues to serve an essential function, and recommended that Congress not amend or repeal it. Finally, the FSOC released its first ever Annual Report.
Sheila Bair stepped down as Chairman of the FDIC, while Martin Gruenberg, formerly Vice Chairman of the FDIC, was named Acting Chairman in her stead. Gruenberg had been nominated in June to serve as Chair of the FDIC. President Obama also announced his intent to nominate Thomas Curry, FDIC Director and former Massachusetts Commissioner and CSBS Chairman, to serve as Comptroller of the Currency. Gruenberg and Curry still await confirmation by the full Senate.
On the mortgage side, Maryland Deputy Commissioner Anne Balcer Norton testified on behalf of CSBS before the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee on mortgage origination. Norton detailed efforts by state regulators to improve and enhance mortgage regulation to better protect consumers and to strengthen the mortgage market itself, and also to ensure a diverse mortgage industry which supports a variety of business models. Also, HUD issued a final rule setting the minimum standards that states must meet to comply with the SAFE Act in licensing mortgage loan originators.
The CFPB also had quite an interesting month. On July 21, the Bureau officially began operations. The Bureau also outlined its approach to supervising large depository institutions and initiated examinations of financial institutions with over $10 billion in total assets. Finally, President Obama nominated Richard Cordray to be director of the CFPB for a term of five years. Cordray previously served as the Attorney General and Treasurer for the state of Ohio. Cordray’s nomination was marked by controversy, as Senate Republicans vowed to block any nominee until the governance structure of the CFPB was changed from a single director to a board. The Senate eventually voted against Cordray’s nomination in December, but President Obama took a bold step in early January 2012 and utilized a recess appointment to install Cordray as Director.
Generally a quiet time in Washington, August failed to meet those expectations as turnover occurred at CSBS and the nation’s economy faltered under the strain of a debt controversy.
John W. Ryan was named President and CEO of CSBS as of September 1, 2011, with full responsibilities taking effect January 1, 2012. Ryan succeeded Neil Milner, who served as President and CEO since October 1996 and retired at the end of the year. Florida also announced the appointment of Tom Grady as Commissioner.
In a dramatic turn of events, President Obama signed into law a compromise bill to raise the nation’s debt ceiling by $2.1 trillion. The debt deal, seen as a compromise for both Republicans and Democrats, raised the nation’s debt ceiling by at least $2.1 trillion in two installments, eliminating the need to raise it again until 2013. The bill generated nearly $1 trillion in deficit reduction due to 10-year discretionary spending caps, according to a White House press release, and most notably, it established a bipartisan, bicameral committee of 12 legislators tasked with the goal of identifying an additional $1.5 trillion in deficit reduction by Nov. 23. Unfortunately, the so-called “Super Committee” failed to meet its goal in November. As a result of the turmoil created by the debt controversy, Standard & Poor’s (S&P) downgraded the U.S. government’s credit rating. S&P cited political uncertainty surrounding Congress’ ability to reduce budget deficits and stabilize the country’s debt burden as its reason for lowering the U.S. credit rating.
NMLS achieved another significant milestone as information on federally registered insured depository institutions and mortgage loan originators employed by such institutions and their subsidiaries became available on NMLS Consumer Access. Also, CSBS released first and second quarter data for state-licensed mortgage companies, branches and individuals in NMLS. The data indicated that while there are multi-state companies operating on a national basis, most state-licensed entities are local companies operating in only one state.
Ongoing turnover continued into September, as Fred Joseph was named Commissioner in Colorado, and Esther George was promoted to President of the Federal Reserve Bank of Kansas City, replacing Thomas Hoenig, who would retire in October.
NMLS and its operating body, the State Regulatory Registry, LLC (SRR) had a big month in September. SRR appointed new state regulators to its Board of Managers. Among other appointments, David J. Cotney, Massachusetts Commissioner, was appointed Chairman. Douglas Foster, Commissioner of the Texas Department of Savings and Mortgage Lending, was appointed Vice Chairman. Gavin M. Gee, Idaho Director, serves as Immediate Past Chairman. Charles A. Vice, Kentucky Commissioner, continues to serve as Treasurer. Darin Domingue, Deputy Chief Examiner of the Louisiana Office of Financial Institutions and President of AARMR, was reappointed to a second 2-year term as the AARMR’s representative on the SRR Board.
The Treasury Department’s Small Business Lending Fund application process officially drew to a close. Ultimately, the $30 billion fund provided just over $4 billion to 332 institutions. Of the 933 applicants, just over 400 were approved. CSBS submitted a letter to Treasury expressing frustration with the lack of clarity surrounding the application process and the lost opportunity the program represented for stimulating small business activity.
October saw yet another new state regulator as Theresa Brady was appointed Commissioner in Mississippi. Also, the newly-established New York Department of Financial Services opened its doors. President Obama also announced the nomination of Thomas M. Hoenig to be Vice Chairman of the FDIC. Hoenig, along with Tom Curry and Marty Gruenberg, awaits final confirmation by the full Senate.
Federal regulators issued a proposal banning banking institutions from proprietary trading and setting limits on private equity investments. The long-awaited proposal – known as the “Volcker Rule,” after former Federal Reserve Board Chairman Paul Volcker – is designed to essentially ban banks from any meaningful proprietary trading. The FSOC issued its proposal for identifying non-bank systemically important financial institutions (SIFIs).
The Financial Stability Board (FSB) released a list of 29 internationally active banks that have been deemed global systemically important financial institutions (G-SIFIs) and will be subject to more capital requirements under new global “too big to fail” rules. Eight of the banks are headquartered in the United States. In a statement released during the G-20 Summit in Cannes, France, the FSB said the named banks are financial institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.” The FSB will update the list of G-SIFIs in November of each year.
December began with a surprising announcement as Representative Barney Frank (D-Mass.), the ranking member of the House Financial Services Committee, declared he will not seek re-election in 2012. Also, after instituting new standards for grading 37 financial institutions, S&P announced it was downgrading 15 banks, including some of the biggest and best-known banks in the U.S. Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase all saw their ratings drop by one notch.
CSBS released a white paper that defines the issue of capital formation at community banks and raises awareness of its importance to the financial system. In the paper, CSBS identified industry, legislative and regulatory challenges these institutions must overcome to increase access to capital. The paper also identified areas for possible solutions to these challenges.
CSBS also issued a press release publicizing the organization’s three strategic goals for 2012. The first goal is to work to maintain CSBS’s central role in both encouraging and maintaining a diverse and competitive banking system and an effective state system of bank supervision and regulation. Second, CSBS will leverage upon NMLS to support a robust licensing and oversight program for state-licensed non-depository financial services providers. Finally, CSBS will commit significant resources and utilize innovative technology to provide premium training and education for state regulators.
CSBS brought the year to a close by bidding a fond farewell to Neil Milner, President and CEO of CSBS from October 1996 to the end of 2011. CSBS thanks Neil for his years of dedicated service.
Outlook for 2012
2012 promises to be another intriguing year. Here are a few things CSBS will be involved in and monitoring closely during the coming year.
• The health of the community banking system. Community banks play a vital role in job creation and economic stability. In 2011, we saw a declining number of bank failures and are expecting even fewer in 2012. That trend signifies at least a more stable economy, yet community banks are still subject to economic and regulatory challenges.
• Economists predict the Treasury yield curve will flatten further by the end of 2012 as a result of the Federal Reserve’s “Operation Twist.” This could be bad news for community banks. If this happens, it may further reduce bank profitability in an already lagging economy and could further discourage bank lending. State regulators will be watching for risks that can arise as banks reach for yield, particularly in an environment where interest rates may not be steady.
• The European debt crisis remains a threat to the U.S. economy. While U.S. banks are said to have moderate exposure to European markets, further contagion could put the U.S. economy at serious risk. Will the challenges Europe faces with a concentrated banking industry spark increased interest in promoting the diversity of the U.S. banking system?
• The year-long, multi-state mortgage fraud settlement between federal and state regulators, state attorneys general and the five largest mortgage servicers was largely expected to be announced in 2011. It’s now likely a deal will be brokered in early 2012.
• Nomination deadlock has left several vital financial regulatory positions vacant or under the stewardship of acting leaders. CSBS hopes that a resolution can be reached in the coming year.
• In Congress, partisan tensions escalated throughout 2011. Considering that 2012 is a presidential election year, any hope of substantive legislation being passed in 2012 is diminished by this partisan atmosphere. In 11 short months, policymakers will be gearing up for a second Obama term or in the stages of planning for a transition of the government.
• Ongoing implementation of the Dodd-Frank Act will keep federal regulatory agencies busy and will present challenges for industry.
• Under Chairman Bernanke’s leadership, the Federal Reserve Board has made an effort to make its operations—particularly those of the Federal Open Market Committee—more open and transparent. As Bernanke embarks upon his final two years as Chairman, this new transparency could prove to be his legacy.
• 2012 will be a pivotal year for modernizing examination tools. In particular, ETS-ALERT will replace the existing ALERT tool across all states, the FDIC, and the Federal Reserve. This deployment is the culmination of several years of collaborative work between these three stakeholders. Examiners should expect a more powerful, flexible, and technologically advanced tool for completing the loan review process.
“It is critical that policies and decisions made in Washington, D.C. carefully consider the impact on smaller banks and the communities they serve. Put simply, how community banks are impacted by Dodd-Frank and other regulatory measures is too important not to understand.”
-- John P. Ducrest, Commissioner of the Louisiana Office of Financial Institutions and CSBS Chairman in his testimony before the Financial Institutions and Consumer Protection Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs on the state of community banking in April.
Catherine Woody, Editor
Rockhelle Johnson, Writer
Edward Smith, Contributing Editor