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CSBS Examiner

A weekly report of events affecting the state banking system from the Conference of State Bank Supervisors


 In This Issue...

 Upcoming Events...

Online Courses starting May 31: Managing the Investment Portfolio and Bank Financial Analysis. 

Stress Testing Forum, June 7-8, Covington, KY:  This forum will include demonstrations of three models specifically developed for community banks. These scenarios will serve to further the discussion of the value and limitations of stress testing.

Senior School, June 20-24, San Diego, CA:  Senior School is designed to meet the specific leadership training needs of state bank regulators who are rising into management positions within their departments or as an examiners-in-charge in the field. 

Examiners Forum, June 27-29, Austin, TX:  The Examiners Forum is designed to bring together Senior Certified Examiners and other "seasoned" examiners to discuss current and emerging issues.  

“There is a curious role reversal. Foolish optimism led to the financial crisis and recession… Now, reflexive pessimism weakens growth by ignoring good news or believing it can’t last.” -- Economist Robert Samuelson (The Washington Post)

A quick survey of the news this week finds most economic indicators looking up, at least from this humble consumer’s point of view. Gasoline prices are easing off, housing prices generally are stabilizing, the foreclosure rate is down, bank profits are returning even if still anemic, irrational exuberance is not rearing its ugly head, inflation is pretty much dormant, and Treasury is actually breaking even on the bailout. Yet far too many of us are still morose and gloomy. Here’s hoping the good news really is here to stay and gets even better!

Veteran Commissioner Sworn In: First Time Commissioner Confirmed

Joseph A. Smith Jr., was sworn in on Wednesday for his third term as North Carolina’s banking commissioner. Smith had been reappointed by Governor Beverly Perdue in January and was then confirmed unanimously by both the North Carolina House and Senate. Smith has served as North Carolina's banking commissioner since 2002 and his new term will run through March 31, 2015. He also serves as the immediate past chairman of CSBS.

Elsewhere, the New York State Senate unanimously confirmed Governor Andrew Cuomo's appointment of Benjamin M. Lawsky on Tuesday to superintendent of the newly created Department of Financial Services. Lawsky will assume his post as the head of the newly created department on October 3, when the banking and insurance departments merge to create the Department of Financial Services. Lawsky currently serves as Cuomo's chief of staff and was deputy counsel and special assistant to Cuomo during his term as attorney general.

A Rundown & Look Ahead of Issues on the Hill

The Hill had an active week, as the Senate Banking, Housing Financial Services, and House Oversight and Government Reform committees all held multiple hearings. The House Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs held an acrimonious May 24th oversight hearing on the Consumer Financial Protection Bureau (CFPB) with Elizabeth Warren. The tone of the hearing was set by Subcommittee Chairman Patrick McHenry (R-NC) in his opening statement where he sharply criticized the CFPB’s efforts in aiding the mortgage servicing settlement talks being conducted between state and federal officials and banking executives.

On May 25th, the House Financial Services Subcommittee on Capital Markets, Government Sponsored Enterprises held a hearing on the future of the housing government sponsored enterprises (GSEs).  Specifically, the hearing was designed to elicit views on a series of seven bills soon to be officially released to reform various aspects of the GSEs.  The same day The House Financial Services Subcommittee on Insurance, Housing and Community Opportunity held a hearing on the future of the Federal Housing Administration (FHA), the Rural Housing Service (RHS), and the Government National Mortgage Association (GNMA). The hearing focused on a draft proposal to reform these three housing agencies, of which the main theme is to reduce taxpayer exposure and provide greater incentives for market forces.

On May 26th, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held an oversight hearing of the Federal Deposit Insurance Corporation (FDIC) where Chairwoman Sheila Bair was the sole witness. Bair received a number of questions, from members on both sides of the aisle, regarding the rigidity of bank examiners.  Members said they have heard complaints from a number of bankers that examiners were being overly strict with performing loans and were being too inflexible when conducting exams. In addition, Bair encountered bi-partisan concern about the qualified residential mortgage (QRM) rule. Bair yielded little ground on the proposed rule, noting that the QRM rule is an exception to the normal rule that entities must retain some risk and, as an exception, it should be narrowly tailored.

After Memorial Day, another hot button issue for the financial industry, debit card interchange legislation, is set to hit the floor, as announced by Senate Majority Leader Harry Reid (D-NV). However Reid did not indicate whether interchange would come up as a standalone bill or as an amendment to other legislation.

OCC Proposed Rule to Implement Several Provisions of Dodd-Frank

The Office of the Comptroller of Currency (OCC) issued a proposal this week that would implement numerous provisions of the Dodd-Frank Act, including a transfer of roles from the Office of Thrift Supervision (OTS) to the OCC and, importantly, changes to national bank preemption and the OCC’s visitorial authority standards. As mandated by Dodd-Frank, the proposed rule eliminates preemption for operating subsidiaries of national banks and incorporates the Cuomo standard for visitorial authority. The proposed rule also removes “obstruct, impair, or condition” language from §7.4009 of their Bank Activities and Operations regulations. CSBS is reviewing the proposal with an eye toward evaluating whether the proposed rule carries out the purposes of the Dodd-Frank provisions addressing the applicability of state law and whether the proposal is consistent with Congress’s clear language and intent rolling back preemption to the Barnett decision’s “prevent or significantly interfere” standard. The deadline for comment on the proposal is June 27. Read more 

FDIC-Insured Institutions Earn $29 Billion in First Quarter 2011

The FDIC announced on Tuesday that FDIC-insured commercial banks and savings institutions reported an aggregate $29 billion profit from first quarter 2011, up $11.6 billion from the year prior. The figures are part of the latest FDIC Quarterly Banking Profile and represent the seventh consecutive quarter of a year-over-year earnings increase. On the flip side, the profits in the industry stemmed from a 60 percent decline in loan loss revenue from the year prior. Also of concern is the continually decreasing operating revenue, which fell by 3.2 percent over the course of the last year, and the drop in loans, which declined by 1.7 percent, the fifth steepest fall on record.

Also included in the profile, 56 percent of institutions reported a higher net income than a year ago, with only 15 percent posting a net loss for the quarter.  Furthermore, average ROA rose from .53 percent to .87 percent, a marked increase. Other notable findings from the FDIC include: quarterly net income rose to a three-year high; loan balances continue to decrease; the number of entities on the FDIC “Problem List” flattened; and the Deposit Insurance Fund (DIF) moved closer toward positive from -$7.4 billion to -$1.0 billion over the course of the quarter. Read more  


BofA, Chase and Wells to Launch New Transfer System Using Mobile Number of Email Address

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., three of the nation’s four largest banks, are launching a system jointly to allow customers to transfer money from their checking accounts using only a mobile number or email address. The service, called clearXchange, will make payments easier than traditional money transfers, which require a bank routing number and move through a system controlled by Federal Reserve banks.

The clearXchange system will initially only be available to customers of the three banks. The system was introduced in Arizona and will roll out in other markets in the near future. By next year, it is expected to be available nationwide. The banks maintain that the new service will be more convenient as it cuts out the middle man: since PayPal isn’t a bank, consumers need to fund an account with money from an existing checking or other account. With clearXchange, the money will be transported directly from a checking account to the account of choice. Unlike Paypal, ClearXchange is linked to existing accounts, so customers do not have to sign up or provide new personal information. Eventually, the banks also expect to add other financial institutions, creating an industry-wide service for moving money.

At this point, it is also unclear how much, if anything, the service will cost. Pricing is up to each participating bank, and if banks do charge for the service, consumers will need to decide if the convenience factor makes it worthwhile.

Around the States

GA: According to the latest Mortgage Asset Research Institute (MARI) figures for May 2011, mortgage fraud within the state of Georgia has decreased considerably in the last year. Georgia weighed in with a Mortgage Fraud Index (MFI) of 66, well below the industry baseline of 100. The baseline represents the level of reported fraud and misrepresentations one would expect from a specified level of loan originations. This is the first time in over a decade where Georgia’s MFI has been below 100 and is a significant improvement from 2003 when Georgia led the nation in mortgage fraud. Due to the volume of mortgage fraud taking place in Georgia in 2003, the Department instituted a risk-based examination program, which focuses primarily on investigating reported fraudulent activity.  Since the implementation of the risk-based examination program, the number of administrative actions and referrals to law enforcement and other regulatory agencies has increased greatly. Read more

OH: The Ohio Division of Financial Institutions held its annual Bankers’ Day Conference on Tuesday. The conference featured experts on state and local economies, the Dodd-Frank Act, community banking, and banking mergers and acquisitions and included addresses by both the Superintendent of the Ohio Division of Financial Institutions, Charles Dolezal, and Deputy Superintendent, Kevin Allard. The conference also featured the Governor of Ohio, John Kasich, as the keynote speaker. Read more _________________________________________________________

Around the Agencies

FHFA: According to the Federal Housing Finance Agency’s (FHFA) seasonally-adjusted purchase-only house price index (HPI), U.S. home prices fell 2.5 percent in the first quarter of 2011, the largest quarterly decline since the fourth quarter of 2008. Furthermore, from the first quarter of 2010 to the first quarter of 2011, home prices continued their downward trend by decreasing 5.5 percent. Based upon sales prices information from Fannie Mae and Freddie Mac-acquired mortgages, the seasonally-adjusted purchase-only HPI declined in 43 states and the District of Columbia during the first quarter of 2011. Read more

HUD: The U.S. Department of Housing & Urban Development (HUD) announced a $1.2 million settlement with U.S. Bank of Minneapolis, the eighth largest mortgage lender in the United States, to resolve non-compliance with FHA requirements on 27 mortgages. A 2006 audit found that U.S. Bank refinanced loans that included overdue principal, interest, and late charges, a violation of FHA underwriting requirements. The audit also found that despite FHA requirements prohibiting the submission of loans in default for late approval, several late approval submissions were in fact, in default. While U.S. Bank does not admit or deny the charges, HUD had documented more than $465,000 associated with the aforementioned violations. Read more

SEC: The Securities and Exchange Commission (SEC) announced Dr. Craig M. Lewis as the new SEC Chief Economist and Director of the Division of Risk, Strategy, and Financial Innovation (RiskFin). Lewis is currently a visiting scholar at the SEC and will assume his new post next month.  As the head of RiskFin, Lewis will guide the interdisciplinary analysis that helps the SEC in policymaking, rulemaking, enforcement, and examinations.  Read more

Treasury: Chrysler Group LLC repaid the remainder of its outstanding Troubled Asset Relief Program (TARP) funds, a sum of $5.1 billion, to the Treasury Department on Tuesday.  The Treasury allocated $12.5 billion towards Chrysler under TARP’s Automotive Industry Financing Program (AIFP), and with this week’s transaction, Chrysler has returned over $10.6 billion to taxpayers through principal repayments, interest, and cancelled commitments. While the Treasury is unlikely to recover the remaining $1.9 billion investment in Chrysler, the department will continue to hold a 6.6 percent stake in the company. Read more _________________________________________________________

Upcoming Events

June 1: The House Financial Services Committee will hold a full-committee hearing to receive annual testimony from the secretary of the Treasury on the state of the international financial system at 10 am EST in room 2128 of the Rayburn House Office Building.

June 7-8: CSBS is conducting a Stress Testing for Community Banks Forum in Covington, Kentucky in coordination with the state banking departments in the Midwest.  The Forum is a timely and comprehensive program on emerging risk management tools and will evaluate the challenges and opportunities of stress testing for community banks.  The session will include demonstrations of three models specifically developed for community banks.  These scenarios will serve to further the discussion of the value and limitations of stress testing.  To register online, click here.

A block of rooms has been reserved for forum attendees at the Radisson Hotel Cincinnati Riverfront at the rate of $95 per person per night, plus tax (currently 11.3%).  Please call 859-491-1200 or toll free 800-333-3333 before May 27 and mention the Conference of State Bank Supervisors at the time the reservation is made in order to receive the special group rate.

Closing Comment

"There are 15 to 20 new mortgage lending requirements in the regulatory pipeline, and their impact on the mortgage and servicing businesses will be more tsunami than simple wave."

-- John Walsh, acting Comptroller of Currency, in remarks at the May 19th Housing Policy Council of the Financial Services Roundtable on issues facing the mortgage lending and servicing industry

Catherine Woody, Editor
Edward Smith, Contributing Editor
Andrea Corson, Contributing Writer

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