With the holidays and the end of the year now upon us, Congress and the various federal regulators have now finished whatever business they were able to finish, but not before making some important decisions.  Two seminal and related events occurred two days ago: the Senate's passage of the Ryan-Murray budget compromise and the FOMC's announcement (hardly coincidental) that it would begin to taper down its bond purchase program beginning in January.  The regulators have cleared their desks with the issuance yesterday and today of several rules, guidance, and other statements that, taken individually, are likely to be important for smaller segments of the banking industry but that collectively will reach most of the industry.  Among other things, the regulators are beginning to grapple with some of the possibly unforeseen consequences of the Volcker Rule, in this case the permissibility of existing investments in pooled trust-preferred securities.

We want to be sure you know about the various developments before the holidays fully overtake us next week, and hence this Friday edition of the weekly newsletter.  This will be our last for the year, but we will be back in business early in January.  Enjoy the next two weeks.

The Economy

  • Senate passes Ryan-Murray budget compromise, House Joint Resolution 59, by 64-36 vote.  Text of HJR 59 available here.
  • FOMC announces plan to taper bond-buying program after Dec. 17-18 meeting.  Statement and related materials available here.
    • January purchases to drop a total of $10 billion from December: $40 billion of agency MBS (down from $45 billion) and $35 billion of longer-term Treasury securities (down from $40 billion).
  • Decision driven by "federal fiscal retrenchment" and perceived "improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy."
    • ""Current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

Community Banking

  • Semiannual Risk Perspective (Fall 2013) published by OCC (Dec. 19), available here. Particular risks now facing banking and thrift industry include: ◦Elevated strategic risk
    • Cyber threats
    • Competition for limited lending opportunities
    • Bank Secrecy Act/Anti-Money Laundering
    • Price volatility in securities

Auto Lending

  • CFPB and Justice Department settle enforcement action against Ally Financial and Ally Bank on racial discrimination in auto lending (Dec. 20).  Materials available here.
    • Prepared remarks of Director Cordray available here


  • CRA asset-size threshold adjustments issued for small and intermediate small institutions (Dec. 19), available here. Such institutions are exempt from certain reporting requirements.
    • Small bank: less than $1.202 billion in assets as of December 31 for either of the prior two calendar years.
    • Intermediate small bank: assets of at least $300 million but less than $1.202 billion as of December 31 for either of the prior two calendar years.

Income Tax Allocation

  • Banking agencies publish propose addendum to Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure.
    • 78 Fed. Reg. 76889 (Dec. 19, 2013), available here.
    • Clarifies that bank must be entitled to its pro rata share of an income tax refund paid to a holding company that files as a consolidated group.
    • Banks and holding companies instructed to "review their tax allocation agreements to ensure that the agreements expressly acknowledge that the holding company receives a tax refund from a taxing authority as agent for the bank and are consistent with certain of the requirements of sections 23A and 23B of the Federal Reserve Act."
    • Sample text included.
    • Comment period ends Jan. 21, 2014.

Interest Rate Risk

  • FDIC warns of increased interest rate and advises banks to review asset and funding mixes and develop risk mitigation strategies (Dec. 19), available here.


  • SEC staff study on Regulation S-K issued (Dec. 20), available here.

Mortgage Lending

  • CFPB launches nationwide education campaign about new mortgage rules (Dec. 18).  (Most rules take effect Jan. 14, 2014.)  Statement available here.

Mortgage Servicing

  • CFTC and state authorities settle civil action against Ocwen regarding flaws in servicing (Dec. 19).  Materials available here.
    • Prepared remarks of Director Cordray available here.

Nominations and Appointments

  • Janet Yellen as Chairman of the Federal Reserve: confirmation vote by full Senate scheduled for Jan. 6.
  • CFTC Acting Chairman: Commissioner Mark P. Wetjen elected by CFTC members (Dec. 17).
    • Nomination of Timothy Massad as Chairman pending.

Online Lending

  • CFPB takes first enforcement action against online lender CashCall.  Materials available here.
    • Prepared remarks of Director Cordray available here.

Payments System

  • 2013 Federal Reserve Payments Study released Dec. 19 and available here. Highlights include:
    • The total number of noncash payments, excluding wire transfers, was 122.8 billion, a growth rate of 4.4 percent annually from 2009 to 2012. The rate of growth was down slightly from the previous 10 year (2003-2012) growth rate of 4.7 percent. The total value of noncash payments grew from $72.2 trillion in 2009 to just under $79 trillion in 2012.
    • The number of credit card payments, which had shown a decline in the 2010 Study, grew at an annual rate of 7.6 percent from 2009 to 2012. Debit card payments grew at a rate of 7.7 percent over that same period.
    • Automated Clearing House (ACH) growth slowed to 5.1 percent annually from 2009 to 2012, down from the average annual growth of 10.9 percent over the previous 10 years. From 2009 to 2012, the number of ACH payments as a percentage of total payments increased less than 1 percent while the value of ACH as a percentage of total noncash payments rose almost 10 percentage points, from 51.5 percent to 61.3 percent.
    • The number of checks paid continues to decline, falling to 18.3 billion, less than half the number a decade earlier (37.3 billion). Checks are increasingly being deposited as images, with 17 percent being deposited as an image at the bank of first deposit versus 13 percent as reported in the 2010 Study.
    • The 2013 Study estimates that there were 31.1 million unauthorized payment transactions in 2012, with a value of $6.1 billion
  • Two related proposals from Federal Reserve regarding collection of checks and other items by the Federal Reserve Banks and funds transfers through the Fedwire and time of settlement.
  • Policy on Payment System Risk, available here.
    • Posting debit and credit entries to Federal Reserve accounts for ACH debit and commercial check transactions
  • Amendments to Regulation J, available here.
    • New power of Federal Reserve Banks to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available to the Reserve Banks as soon as one half-hour after receipt of the checks.
    • Reserve Banks may obtain settlement from paying banks by as early as 8:30 a.m. Eastern time for checks that the Reserve Banks present.
    • Comment deadline: Feb. 10, 2014.

Social Media

Student Lending

  • CFPB calls on financial institutions to disclose agreements with colleges and universities to market debit, prepaid, and other products to students.  (Agreements with respect to credit cards are disclosed.)  Materials available here.
    • CFPB report, College Credit Card Agreements, available here.

Too Big to Fail

  • Office of Financial Research, 2013 Annual Report, available here.
    • Threats to financial stability include vulnerabilities in three areas: markets for  securities financing transactions and credit, possible increases in interest rates and volatility, and operational risk.
    • Prototype "Financial Stability Monitor" to identify emerging economic threats.

Truth in Lending

  • Adjustments to certain dollar thresholds in Regulation Z issued by CFTC, 78 Fed. Reg. 76033 (Dec. 16, 2013), available here.
    • Take effect Jan. 1, 2014
    • CARD Act
      • Safe harbor for penalty fees for violating account terms under CARD Act: $26 for first-time violation; $37 for certain repeat violations.
      • No change to minimum interest charge thresholds that trigger CARD Act disclosures: currently $1.00.
    • HEPA
      • Mortgage loan subject to HOEPA requirements if points and fees exceed the greater of 8% or $632.

Volcker Rule

  • Trust preferred securities: banking agencies issue guidance on application to pooled TruPS of Volcker Rule prohibition on investments in private equity and hedge funds (Dec. 19).  FAQs and related material available here.
    • Issues:
      • Pooled TruPS are issued in the form of collateralized debt obligations (CDOs), which may be treated as funds subject to the Investment Company Act.
      • The Act contains certain exemptions, including exemptions for funds with 100 or fewer investors (3(c)(1)) and for funds that accept only "qualified" investors and often are limited to fewer than 500 investors (3(c)(7).
      • Under Volcker, a fund that relies on either of these two exemptions is a private equity fund or a hedge fund – in which investments by banks, their holding companies, and affiliates are prohibited.
      • There is a potentially important accounting consequence for banks now holding prohibited CDOs backed by TruPS: the prohibition means that the investments have suffered an other-than-temporary impairment and effectively must be written down.
    • Regulatory response:
      • If a fund can rely on an Investment Company Act exemption other than 3(c)(1) or 3(c)(7), then the investments are not prohibited by Volcker.  The FAQs do not specify other exemptions
      • Banks should examine the structures of their specific CDO investments.  Some structures already may qualify for a different exemption.  It may be possible to restructure others to take advantage of another exemption.
      • Possibly an easier way to avoid the prohibition is to consider the bank's economic rights in the CDO.  The investment prohibition goes specifically to "ownership," which is a defined term and does not include all forms of economic interest.
      • OTTI accounting issue not addressed.

Regulatory Comment Deadlines

  • Jan. 14, 2014 – CFTC: Position limits and aggregation of positions.
  • Jan. 21, 2014 – Federal Reserve, OCC, FDIC: addendum to Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure.
  • Jan. 31, 2014 – Federal Reserve (OCC, FDIC): liquidity coverage ratio.
  • Feb. 3, 2014 -- SEC: Regulation Crowdfunding
  • Feb. 7, 2014 – CFPB, Federal Reserve, OCC, FDIC, NCUA, SEC: Standards for assessing diversity policies and practices.
  • Feb. 10, 2014 – CFPB: Debt collection (advance notice of proposed rulemaking)
  • Feb. 10, 2014 – Federal Reserve: amendments to Policy Statement on Payment System Risk regarding posting of debits and credits to Federal Reserve accounts and Regulation J regarding settlements of checks and payments of proceeds to Federal Reserve Banks.
  • Feb. 18, 2014 – FDIC: Single point of entry strategy for orderly liquidations.
  • Mar. 17, 2014 – CFPB: Regulation E, list of countries qualifying for safe harbor
  • May 2, 2014 – Federal Reserve: Application of Regulation CC to electronic checks and electronic returned checks.