The banking agencies look to be trying to clear the decks with the release of several important rules and policies over the past week, chief among them the Volcker Rule. These developments present greater rather than fewer regulatory compliance concerns, and we lead off with a very significant issue for community banks that hold trust preferred securities: these banks may have to write off these holdings as of the end of this year. This, and the full range of items over the past week are as follows:
Community Banks/Trust Preferreds/Volcker
Final Volcker Rule regulation requires all banks to divest holdings in CDOs by July 21, 2015. This requirement would appear to result in an other-than-temporary impairment of investments in trust preferreds, effectively compelling a writedown of these holdings in the reporting period ending Dec. 31, 2013.
- Regulators seem to be aware of the issue, but no guidance yet forthcoming.
- For fuller discussion of final regulation, see Volcker Rule below.
- House of Representatives passes Ryan-Murray budget compromise, House Joint Resolution 59, by 332-94 vote (Dec. 12). Text available through THOMAS here.
- Senate likely to vote this coming Wednesday, the 18th.
CFPB published preliminary research on pre-dispute arbitration clauses in credit card and checking account agreements (Dec. 12), available here.
- Required by Dodd-Frank section 1028(a).
- Approximately 90% of clauses allow banks to prevent consumers from joining class actions.
- De minimis number of disputes filed 2010-20122.
- Remarks of Director Cordray at field hearing on arbitration (Dec. 12), available here.
Electronic Banking – Check Collection
Federal Reserve proposes applying Regulation CC requirements to electronic checks and electronic returned checks (Dec. 12). Proposed rule available here.
- Designed to encourage depository banks to receive and paying banks to send returned checks electronically.
- Two alternatives proposed for amendment of expeditious-return requirement.
- Comment period ends May 2, 2014.
Federal Reserve Banks
- Federal Reserve designates chairs and deputy chairs of the Federal Reserve Banks (Dec. 13). Designations available here.
Appraisals for Higher-Priced Mortgage Loans – Supplemental Final Rule issued by Federal Reserve, CFPB, FDIC, FHFA, NCUA, and OCC (Dec. 12) and available here.
- Financings of $25,000 or less exempt from Dodd-Frank appraisal requirements.
- Manufactured home loans given 18 month delay; appraisal requirements become effective July 18, 2015. Appraisal requirements vary depending on whether home is new or pre-owned and on nature of security for the loan.
Interagency Statement on Supervisory Approach for Qualified and Non-Qualified Mortgage Loans released Dec. 13. Available here.
- "The agencies emphasize that institutions may originate both QMs and non-QMs, based on their business strategies and risk appetites. Residential mortgage loans will not be subject to safety-and-soundness criticism based solely on their status as QMs or non-QMs."
- "Regardless of whether residential mortgage loans are QMs or non-QMs, the agencies continue to expect institutions to underwrite residential mortgage loans in a prudent fashion and address key risk areas in their residential mortgage lending, including loan terms, borrower qualification standards, loan-to-value limits, and documentation requirements."
- "The agencies that conduct CRA evaluations do not anticipate that institutions’ decisions to originate only QMs, absent other factors, would adversely affect their CRA evaluations."
Social Media: Consumer Compliance Risk Management Guidance, FFIEC statement issued Dec. 11, and available here.
- Highlights existing regulations that should be encompassed by comprehensive risk management framework for social media.
- Distributed as Federal Reserve CA Letter 13-22 and FDIC FIL-56-2013. Also adopted by OCC, CFPB, NCUA, and State Liaison Committee.
Swaps and Derivatives
Proposed position limits for 28 exempt and agricultural commodity futures and option contracts published in Federal Register, 78 Fed. Reg. 75680 (Dec. 12), available here.
- Comment deadline: Feb. 10, 2014
Too Big to Fail
- FDIC proposes “Single Point of Entry Strategy” for orderly liquidations under Title II of Dodd-Frank. Proposal available here.
- “Global Banking: A Failure of Structural Integrity.” Remarks by FDIC Vice Chairman Hoenig at the Institute of International and European Affairs (Dec. 13). Text is available here
Final Volcker Rule approved by Federal Reserve, FDIC, SEC, CFTC, and OCC (Dec. 10). Text of rule, preamble, and supporting materials available here.
- Community banks are not explicitly exempt but certain exceptions available to all institutions may protect most current activities, as follows:
- Permitted trading activities include trading in certain government, agency, State or municipal bonds or other obligations; trading for the purpose of liquidity management, satisfying a debt previously contracted or risk-mitigating hedging; and entering into repos or securities lending transactions.
Investing in hedge funds or private equity funds: while most community banks do not invest in what are commonly regarded as hedge or private equity funds, the definition sweeps broadly and includes investments in asset-backed securities that do not meet certain criteria. Investments in CLOs and CDOs – which includes trust-preferred securities – may have to be divested. ◦Compliance program is necessary for any community bank engaged in any activity covered by the Volcker Rule, even if the Rule permits the particular activity.
- No compliance program necessary if Volcker-covered activities are limited to trading in certain government, agency, State and municipal obligations.
- Compliance not required until July 21, 2015.
- Texas Community Bank, N.A. (Dec. 13). ◦Deposits assumed and branches acquired by Spirit of Texas Bank, SSB.
- House Financial Services Committee hearings
Senate Banking Committee hearings
- "Housing Finance Reform: Fundamentals of Transferring Credit Risk in a Future Housing Finance System" (Dec. 10). Written testimony and archived webcast available here.
- "Rebuilding American Manufacturing" (Dec. 11). Written testimony and archived webcast available here.
- "Assessing the P5+1 Interim Nuclear Agreement with Iran: Administration Perspectives" (Dec. 12). Written testimony and archived webcast available here.
Senate Banking Committee nomination hearing (Dec. 17)
- Arun M. Kumar to be Assistant Secretary and Director General of the United States and Foreign Commercial Service, U.S. Department of Commerce
Regulatory Comment Deadlines
- Dec. 24 – CFPB, Federal Reserve, OCC, FDIC, NCUA, SEC: Standards for assessing diversity policies and practices.
- Jan. 14, 2014 – CFTC: Position limits and aggregation of positions.
- Jan. 31, 2014 – Federal Reserve (OCC, FDIC): liquidity coverage ratio.
- Feb. 3, 2014 -- SEC: Regulation Crowdfunding
- Feb. 10, 2014 – CFPB: Debt collection (advance notice of proposed rulemaking)
- 60 days after publication in the Federal Register – 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.