“Everything’s got a moral, if only you can find it.” -- Lewis Carroll
Congress never does anything meaningless; every line of every bill gives someone a break or smacks down someone else, a senior lobbyist once told us. It’s true – everything’s got a moral, and that’s why our staff members are tracking and speaking up on more than 130 issues and studies mandated by the Dodd-Frank Act. Every one of them has implications for state banks and the dual-banking system.
FASB Exempts “Plain-Vanilla” Loans from Fair Value Proposal
This week the Financial Accounting Standards Board (FASB) endorsed an exemption for plain-vanilla loans held to maturity from their controversial plan to expand the use of fair-value accounting in financial institutions. The original proposal, which was released in May and has elicited thousands of public comments, would have made fair value accounting the standard for almost all financial institutions.
If the exemption is part of the final rule, the plan-vanilla loans would be priced using cost accounting, a method that relies on gauges of impairment rather than market prices. How the asset was obtained and how the owner planned to use the asset will determine its eligibility for cost accounting, though assets serving a trading or treasury management function will not be eligible for cost accounting.
John Ducrest, CSBS Chairman and Commissioner of the Louisiana Office of Financial Institutions, praised FASB’s move. “The FASB’s decision is a victory for community banks,” Ducrest said. “This decision will protect relationship lending, which is a significant part of the community bank business model. Banks should not have to alter their business model to accommodate accounting standards.” Ducrest concluded by encouraging the FASB “to continue to critically analyze its proposed fair value model while considering the role community banks play in our economy.”
The American Bankers Association also expressed support for FASB’s decision. “Today’s shift recognizes investor concerns that a company’s business model should be a key factor in measuring financial instruments,” ABA President and Chief Executive Frank Keating said in a public statement.
It is unclear if FASB will re-issue the proposal for another round of public comment or if the exemption will be included in a final ruling made later this year.
CSBS strongly opposed FASB’s original proposal. Read the CSBS comment letter
Financial Crisis Inquiry Commission Issues Report, Criticizes Preemption
The Financial Crisis Inquiry Commission, which was charged with examining the financial and economic crisis and explaining its causes, issued its final report this week. In its pursuit of producing this report, the FCIC held 19 days of public hearings, interviewed more than 700 witnesses and reviewed millions of pages of documents.
In the 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 OCC and OTS for preempting state consumer protection laws and hindering state efforts to curb abuses because the agencies were “caught up in turf wars.”
The Commission is comprised of 10 members. The six Democrat members endorsed the final report, and all four Republicans dissented and produced two dissenting reports. The majority report faulted former Federal Reserve Chairman Alan Greenspan and current Chairman Ben Bernanke for failing to prevent the expansion of the housing bubble and failing to stem the flow of toxic mortgages.
Ultimately, the Commission found that “the crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.” Read more
Inspector General Report Looks at CFPB Operations
A joint report by the Office of Inspector General of the Federal Reserve and Treasury answered questions about permissible activities that the Treasury Department could take on behalf of the new Bureau of Consumer Financial Protection before a director is confirmed by the Senate. The report also addressed Treasury’s authority if a director has not been named by the July 21 transfer date. In that case, the report said, Treasury could issue rules and guidance for existing regulations, as well as conduct certain examinations. However, Treasury could not take action for a new authority established for the Bureau by the Dodd-Frank Act, such as defining unfair, deceptive and abusive practices for consumer financial products and services. The federal officials were responding to a letter sent by House Financial Services Chairman Spencer Bachus (R-Ala.) and Rep. Judy Biggert (R-Ill.). Read more _________________________________________________________
Around the States
ME: Maine’s state-chartered financial institutions were able to weather the recession and the continuing sluggish recovery in 2010, according an annual report published by the Maine Bureau of Financial Institutions. The report found that the earnings of Maine financial institutions were sufficient to support slow growth with easing in the rapid deterioration of loan quality that occurred in 2008 and 2009. While credit was not as readily or easily available as it had been in the mid-2000’s, creditworthy borrowers were able to obtain funds with somewhat tighter underwriting standards. The bureau provided assistance to more than 1,050 consumers with complaints or inquiries related to a specific financial institution or a type of financial product. A significant number of these complaints and inquiries involved credit cards and mortgages. The report noted that the number of mortgages originated by Maine financial institutions declined by 18 percent compared to 2009. Read more
MA: Massachusetts Undersecretary for Consumer Affairs and Business Regulation Barbara Anthony explained proposed regulations and legislation concerning foreclosures and reverse mortgages at the first of three public hearings. The hearing covered regulations proposed by the Division of Banks for foreclosure right-to-cure notices and reverse mortgages. The regulatory proposal would mandate that the right-to-cure notice to a consumer include proof from the lender that it is the rightful mortgage holder. The legislative proposal would mandate that lenders also include proof of mortgage ownership when filing for foreclosure in Land Court. Currently, lenders must submit to the Court proof that they provided a homeowner with the right-to-cure notice. Through the hearings, the Division of Banks is seeking information about the timing of the cure period, counseling options, and alternatives to foreclosure sales. For reverse mortgages, the Division is focusing on opt-in and counseling certification requirements, along with current counseling options and personal experiences in reverse-mortgage counseling. Read more
WA: The Washington State Department of Financial Institutions (DFI) took action against an online payday lender. DFI halted the selling of retail installment loans to Washington residents by Checkmania, Inc., doing business as Checkmate, and a related Internet company, Checkmate Express Corporation, doing business as Checkmate Express that violated the state’s payday loan limits. The law limits the number of payday loans licensee may make to borrowers. “Ever since, companies within the industry have attempted to evade these limitations by structuring loans to appear as if they were not payday loans,” said DFI Director Deb Bortner. In this case, Checkmate promoted loans for borrowers to purchase $100 gift cards from select retailers, charging an annual percentage rate of up to 391 percent for a 15-day loan. The loans were due on the borrower’s next payday, and were specifically marketed to borrowers to whom Checkmate was not permitted to make another payday loan because the borrower had reached their eight-loan limit. “The department intends to look to the substance, not the form, of a loan, and immediately step in to stop violations of the law,” Bortner added. Read more
Around the Agencies
FBI: The FBI announced a case that involved the stealing of some $10 million from 10 banks in Florida through small business loans and lines of credit. In addition, a separate identity theft scam targeting the same banks was uncovered. The FBI said the alleged ringleader of the fraud scheme was the owner of a loan brokerage business called Palm Beach Business Consultants. The company specialized in fraudulently obtained loans and lines of credit for clients for a price ranging from $12,500 to $25,000. In most cases, the applications were in the client’s name, but occasionally the name of a client’s friend or relative with good credit was used instead. Sometimes a legitimate uninvolved corporation was used. Insiders in the bank ensured the loans were approved for a fee ranging between $1,000 to $10,000. So far in the case, 24 individuals have been indicted, including seven bankers. The investigation also uncovered an identity theft ring that used the names and information of real people to create fictitious drivers’ licenses and other phony documents to steal from their bank accounts and try to obtain bank loans and credit in their names. Read more
FinCEN: The Financial Crimes Enforcement Network advised financial institutions to take reasonable steps to guard against the potential flow of illicit assets due to the current political and social unrest in Tunisia and abrupt changes in the government. FinCEN called for financial institutions to apply enhanced scrutiny for private banking accounts held by or on behalf of senior foreign political figures and to monitor transactions that could potentially represent misappropriated or diverted State assets, proceeds of bribery or other illegal payments, or other public corruption proceeds originating in or diverted from Tunisia. The guidance called for banks to file a Suspicious Activity Report if “a transaction relating to senior foreign political figures involves funds derived from illicit activity, if the transaction appears to have no business or lawful purpose, or if a customer has engaged in activities indicative of money laundering, terrorist financing, or any other violation of federal law or regulation.” Read more
SEC: The Securities and Exchange Commission completed a Congressional study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers. The study concluded that “retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer." Currently, the study found that many retail investors do not understand the roles played by investment advisers and broker-dealers. The study also recommended that when broker-dealers and investment advisers are performing the same or substantially similar functions, SEC should consider harmonizing the rules that apply to both professionals. Read more
SEC: The Securities and Exchange Commission adopted new rules concerning shareholder approval of executive compensation and "golden parachute" compensation arrangements. The SEC's new rules specify that the say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011. The rules require companies to provide additional disclosure on "golden parachute" compensation arrangements with certain executive officers in connection with merger transactions. The Commission adopted a temporary exemption for smaller reporting companies with public float of less than $75 million. These smaller companies will not have to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013. Read more
Treasury: The Treasury Department announced the leadership team for the Office of the General Counsel within the Consumer Financial Protection Bureau (CFPB). Assistant to the President and Special Advisor to the Secretary of the Treasury Elizabeth Warren named Len Kennedy to serve as general counsel, Meredith Fuchs to serve as principal deputy general counsel, and Roberto Gonzalez and Michael Gordon to serve as deputy general counsels. Kennedy comes to the position from serving as the general counsel, corporate secretary and chief government affairs officer for Sprint Nextel Corporation, where he managed a legal department of 131 attorneys and advised the board of directors, CEO and senior management on all aspects of the company’s business and legal affairs. Fuchs comes to the position from serving at the chief investigative counsel for the House Committee on Energy and Commerce. Gonzalez previously was the associate counsel and special assistant to President Obama. Gordon transitions to this new role from the Treasury Department where he served as counselor to the general counsel. Read more
Feb. 1: CSBS and AARMR are hosting a web-based Model Examination Guidelines School, designed to assist mortgage regulators and mortgage industry compliance personnel implement the examination procedures for the Guidance on Nontraditional Mortgage Product Risks and the Statement on Subprime Mortgage Lending.
Feb. 7 – 10: The Nationwide Mortgage Licensing System & Registry (NMLS) is conducting the third annual NMLS User Conference & Training for regulatory and industry system users, education providers, consultants and other interested parties. The Conference provides an invaluable exchange of information on issues surrounding residential mortgage supervision. Read more
“In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America. I will submit that proposal to Congress for a vote—and we will push to get it passed.”
--President of the United States Barack Obama in his State of the Union address.
Catherine Woody, Editor
Edward Smith, Contributing Editor
Teresa Dean, Contributing Writer