"Of course I’m in shape. Round is a shape." – Apocryphal T-shirt
Having recently consolidated the entire CSBS staff on a single floor in new office space, it quickly dawned on us that there were some faces that we couldn’t connect with names. At the same time, some of us developed a new interest in fitness. The solution was a three-week competition in which staff members were challenged to take minimum 20-minute walks with co-workers outside their division. Being a regulatory organization, rules were developed, tracking sheets were created, and pedometers were handed out. Pretty much everyone participated, but this writer – alas – set his pedometer on calories used, not steps taken. As Prime Minister Cameron said the other day, we live and learn. And, in a roundabout way, we’re definitely in shape, whatever that is.
The Dodd-Frank Act: One Year Later
Yesterday marks the one-year anniversary of the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In the 12 months since its passage, regulators have worked aggressively to implement the many provisions found in the law. As reported in American Banker, according to the law firm Davis Polk, so far regulators have issued 121 proposals, finalized 38 rules, and missed 26 deadlines. Under Dodd-Frank, the one-year anniversary also triggered the transfer of SAFE Act oversight of the Nationwide Mortgage Licensing System and Registry (NMLS) from HUD to CFPB. Additionally, the CSBS contract with the federal banking agencies to register mortgage loan officers and their depository employers through NMLS was amended to transfer the contract from the banking agencies to CFPB, effective July 21st. Below is a summary of the more significant milestones achieved in the year since passage of Dodd-Frank.
One of the more drastic changes imposed by Dodd-Frank has been the creation of several new federal agencies and the disintegration of another.
Consumer Financial Protection Bureau
Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), an independent agency housed within the Federal Reserve established to conduct rulemaking, supervision, and enforcement for federal consumer financial protection laws; restrict unfair, deceptive, or abusive acts or practices; create a center to take and resolve consumer complaints; and promote financial education, among other things. So far, the CFPB has hired nearly 500 employees and intends to have approximately 1,000 employees hired by year-end.
As of yesterday, the CFPB now has rulemaking authority for existing consumer financial laws that had previously been housed in other federal agencies. The CFPB also has the authority to begin examining banks with over $10 billion in assets for compliance with federal consumer financial laws. The CFPB has signed MOUs with several entities, including many states and CSBS, has made progress on merging and streamlining mortgage disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act, and has also explored the impact of the CARD Act.
However, the CFPB remains a political lightning rod. The CFPB is prohibited from engaging in some of its statutory directives, such as supervision of non-depository financial service providers and some rulewriting, until a director is confirmed by the U.S. Senate. The CFPB has been organized under the leadership of Elizabeth Warren, but Richard Cordray, head of enforcement at the CFPB, has been nominated by President Obama to serve as CFPB director.
Financial Stability Oversight Council
The Financial Stability Oversight Council (FSOC) has been active for several months, and is charged with identifying threats to the financial stability of the United States and responding to emerging risks. The FSOC is chaired by Treasury Secretary Timothy Geithner and consists of the Chairman of the Federal Reserve Board (FRB), the Comptroller of the Currency, the Director of the CFPB, the Chairman of the Securities and Exchange Commission, the Chairman of the Federal Deposit Insurance Corporation (FDIC), the Chairman of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration, the Director of the Office of Financial Research, a state insurance commissioner, a state securities commissioner, Senate, and a state banking supervisor. Commissioner of the California Department of Financial Institutions Will S. (Bill) Haraf represents state bank regulators on the FSOC.
Since the FSOC’s inaugural meeting in October, the FSOC has established bylaws and a transparency policy; has drafted and issued reports on the concentration limit for large financial companies, implementing the Volcker Rule, and secured creditor haircuts; has issued a proposed rule regarding authority to require supervision and regulation of certain non-bank financial companies; and has issued a final rule on authority to designate financial market utilities as systemically important.
Office of Financial Research
The Dodd-Frank Act also created the Office of Financial Research (OFR) within the Treasury Department to improve the quality of financial data and facilitate more robust and sophisticated analysis of the financial system. To execute these functions, OFR has two primary operational centers: a Data Center to standardize, validate, and maintain the data necessary to help regulators identify vulnerabilities in the system; and a Research and Analysis Center to conduct, coordinate, and sponsor research to support and improve financial regulation.
Office of Thrift Supervision
Yesterday, supervision authority of federally chartered thrifts and savings and loan holding companies transferred from the Office of Thrift Supervision (OTS) to the Office of the Comptroller of the Currency (OCC), the FDIC, and the FRB. The federal banking agencies have engaged in promulgating rules to assume the supervisory responsibilities of the OTS.
The Dodd-Frank Act provisions for capital have mostly been implemented. The Collins Amendment, which establishes a floor for all banks and stricter criteria for Tier 1 capital, was finalized earlier this year. The FDIC was also required to issue a study on core and brokered deposits, which they did this week.
No one wants to bail out firms in the future, so Dodd-Frank sought to grant the necessary tools and authority to resolve systemically important financial institutions (SIFIs), which were saved in the financial crisis because they were considered "too big to fail." The FDIC has done a tremendous amount of work in this area. They have finalized rules clarifying the relief and claims priority for creditors, have issued a joint proposal requiring "living wills" from large firms, and have released a report reflecting the estimated resolution of Lehman Brothers had the FDIC’s orderly liquidation authority been in place in 2008. Ultimately, however, it remains to be seen if the processes and rules put in place could be effective, or if policymakers and regulators have the will to resolve a large, complex and powerful firm if necessary.
The Durbin Amendment, as it is commonly known, has proven to be one of the more controversial provisions of the Dodd-Frank Act. Under Dodd-Frank, the Federal Reserve is required to cap interchange fees on debit-card transactions. It does exempt banks under $10 billion in assets, but the industry, state and federal regulators have all expressed concern that the exemption could be effectively implemented. Despite public calls and legal injunctions to delay implementation to study the implications of the Durbin Amendment, a final rule was issued by the Federal Reserve and will go into effect in October 2011.
A significant amount of work remains to be accomplished to fully implement the Dodd-Frank Act, but it is undeniable a tremendous amount has already been achieved. It will be interesting to see what the coming year has in store for the nation’s financial services industry.
OCC Issues Final Rules on Preemption
The OCC has issued a final rule implementing several provisions of the Dodd-Frank Act, including revisions to the OCC’s rules on preemption and visitorial powers. CSBS had previously submitted two comment letters to the OCC in response to their notice of proposed rulemaking issued on May 26, 2011. The first letter encouraged the OCC to extend the comment deadline beyond the June 27 comment deadline, and the second letter expressed our objections to the proposed revisions for failing to acknowledge the state-federal balance that the plain statutory language of Dodd-Frank intended. Unfortunately, the OCC’s final rule largely echoes the proposed rule, and therefore fails to implement the standard clearly laid out by Congress in Dodd-Frank.
In addition to submitting comment letters, CSBS has spoken publicly on the OCC’s final rule. Buz Gorman, CSBS General Counsel, was quoted in American Banker saying, "It still has a long way to go, we think, to meet the statutory intent." Gorman was also quoted in Bloomberg. "It is not clear that anything has changed to what they proposed in their initial proposal," Gorman said. "I think they are willing to review their previous determinations; question is what standards are they going to use?" Finally, Margaret Liu, CSBS Senior Vice President and Deputy General Counsel, was quoted in BNA Banking Daily, saying, "We think the OCC still has a long way to go for it to be consistent with the statute and what Congress said. There’s no avoiding the fact that this will be further refined."
Richard Cordray Nominated as Director of CFPB
President Obama announced Monday he has nominated Richard Cordray to be director of the CFPB for a term of five years. Cordray is currently the head of the enforcement division of the CFPB and previously served as the Attorney General and Treasurer for the state of Ohio. "The fact is the financial crisis and the recession were not the result of normal economic cycles or just a run of bad luck," President Obama said in his statement announcing Cordray’s nomination."There were abuses and there was a lack of smart regulations. So we’re not just going to shrug our shoulders and hope it doesn’t happen again. We’re not going to go back to the status quo where consumers couldn’t count on getting protections that they deserved. We’re not going to go back to a time when our whole economy was vulnerable to a massive financial crisis. That’s why reform matters. That’s why this bureau matters. I will fight any efforts to repeal or undermine the important changes that we passed. And we are going to stand up this bureau and make sure it is doing the right thing for middle-class families all across the country." Read more here.
Around the States
LA: On June 4, 2011, Hancock Bank of Louisiana (HBLA), Baton Rouge, LA, acquired Whitney National Bank, New Orleans, LA. Simultaneously, HBLA changed its name to Whitney Bank, and relocated its main office from Baton Rouge to New Orleans. Effective June 21, 2011, Teche Federal Bank, New Iberia, Louisiana, converted from a Federal Savings Bank under the jurisdiction of the Office of OTS to a state-chartered commercial bank.
MN: Minnesota Governor Mark Dayton signed a budget Wednesday, ending the 20-day state government shutdown. State lawmakers had fought for weeks regarding taxes and spending. During the shutdown, which began on July 1, the state forfeited millions of dollars in lost revenue and laid off approximately 22,000 state employees. Minnesota was the last state to adopt its fiscal 2012 budget. All other states adopted budgets on time, resulting in the lowest number of late budgets in recent history.
Around the Agencies
CFPB: The CFPB has issued a report examining the differences between credit scores sold to consumers and scores used by lenders to make credit decisions. The study, which was required by the Dodd-Frank Act, covers the process of developing credit scoring models, why different scoring models may produce different scores for the same consumer, how different scoring models are used by creditors in the marketplace, what credit scores are available to consumers for purchase, and ways that differences between the scores may disadvantage consumers. Read more here.
CFPB: The CFPB has issued a report recommending principles for maximizing consumers’ ability to receive and use exchange rate information when making remittance transfers, and examines the incentives and challenges related to using remittance data in credit scores. The report, mandated by the Dodd-Frank Act, analyzes two subjects related to remittance transfers: the transparency and disclosure to consumers of exchange rates used in remittance transfers; and the potential for using remittance histories to enhance the credit scores of consumers. Read more here.
FDIC: As required by the Dodd-Frank Act, the FDIC has issued a study on regulatory treatment of core and brokered deposits. During the early part of the current wave of heightened bank failures, the FDIC observed concentrations in commercial real estate and construction and development funded by brokered deposits. The FDIC also observed that technological advances have outpaced the statute governing brokered deposits, which was enacted in 1989. Through the course of their outreach and research, the FDIC heard many concerns from the industry about the brokered deposit statute. The FDIC acknowledged these concerns, but still has serious concerns about brokered deposits. According to their research, the FDIC found that as brokered deposit levels increase, the probability that a bank will fail also increases, and are more costly to the Deposit Insurance Fund if they do fail. Therefore, the FDIC concluded that the brokered deposit statute continues to serve an essential function, and recommends that Congress not amend or repeal it. Read more here.
FRB: The Federal Reserve Board has issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers. The $85 million civil money penalty is the largest the Board has assessed in a consumer-protection enforcement action and is the first formal enforcement action taken by a federal bank regulatory agency to address alleged steering of borrowers into high-cost, subprime loans. Read more here.
FTC: The FTC issued a statement last week that it will not enforce most provisions of its Mortgage Assistance Relief Services (MARS) rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales. As a result of the FTC’s announcement, these real estate professionals will not have to make disclosures required by the rule that, in the context of assisting with short sales, could be misleading or confusing to consumers. The stay in enforcement applies only to real estate professionals who: are licensed and in good standing under state licensing requirements; comply with state laws governing the practices of real estate professionals; and assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. Read more here.
FTC: The FTC has issued a new rule to strengthen consumer protections by banning deceptive claims about consumer mortgages in advertising or other types of commercial communications. The new rule lists 19 examples of prohibited deceptive claims, including misrepresentations about: fees or costs to the consumer; the variability of terms of the mortgage; the type of mortgage offered; the source of an advertisement; and the consumer’s ability or likelihood of obtaining a refinancing or modification of a mortgage or any of its terms. Read more here.
FinCEN: The Financial Crimes Enforcement Network (FinCEN) announced that money services businesses (MSBs) are now able to register with FinCEN using the Bank Secrecy Act (BSA) E-Filing System. BSA E-Filing is a free, web-based electronic system that allows MSBs to submit their Registration of Money Services Business form and other BSA reports through a secure network. Use of the new system is faster and will be more convenient, secure, and cost-effective for MSBs. Read more here.
FinCEN: FinCEN released a final rule, "Definitions and Other Regulations Relating to Money Services Businesses," to more clearly define which businesses qualify as MSBs and therefore are subject to anti-money laundering rules under BSA. Read more here.
FSOC: The FSOC met Monday and approved the following documents and resolutions: a final rule on the Council’s authority to designate financial market utilities as systemically important; a secured creditor haircut study; and the minutes of two previous meetings. The members also discussed the FSOC’s 2011 Annual Report, which will be finalized and released in coming days. William S. (Bill) Haraf, commissioner of the California Department of Financial Institutions, represents state banking regulators on the FSOC, and was in attendance at Monday’s meeting. Read more here.
July 26: The Senate Banking Committee is holding a hearing at 10:00 am on the nominations of Martin Gruenberg to be chairman of the FDIC; Thomas Curry to be comptroller of the currency; and S. Roy Woodall, Jr. to be a member of the FSOC.
July 28: Stress Testing Forum, Chicago, Illinois. This forum will evaluate the challenges and opportunities with stress testing for community banks. The session will include demonstrations of three models specifically developed for community banks. Read more here.
July 28: The House Financial Services Committee is holding a hearing at 9:30 am on the state of the international financial system and the first annual report of the FSOC.
July 29: The Securities and Exchange Commission (SEC) announced it will hold a municipal securities market field hearing in Jefferson Country, Alabama. Topics will include distressed communities, small issuers, disclosure, derivatives, and pre-trade price transparency. Read more here.
"Hopefully, this is a chance to hit the restart button—but the challenges of a federal agency are significant." -- CSBS Executive Vice President John Ryan in an interview with The Wall Street Journal on the creation of the Consumer Financial Protection Bureau.
Catherine Woody, Editor
Edward Smith, Contributing Editor
Rockhelle Johnson, Contributing Writer