Finalization of the credit risk retention rule received the most publicity last week. The significance of the rule for community banks is that residential mortgage loans, commercial loans, commercial real estate loans, and auto loans that meet certain underwriting and other criteria do not, when securitized, trigger a risk retention obligation for securitizers.  These loans accordingly are likely to be far more desirable, and many banks should revisit their policies to determine whether their lending practices satisfy the requirements for an exemption. We will be providing a guidance document shortly.

Elsewhere, the CFPB finalized two modest rules dealing with mortgage loans and privacy.  The banking agencies proposed modifications to the flood insurance rules to reflect the Homeowner Flood Insurance Affordability Act of 2014.  The full set of developments over the past week is as follows: 

BSA/AML

CFPB

Corporate Governance/Tone at the Top

Credit Risk Retention

Cybersecurity

Executive Compensation

Fannie Mae/Freddie Mac

Flood Insurance

  • Agencies propose amendments to flood insurance regulations to implement provisions of the Homeowner Flood Insurance Affordability Act of 2014 (Oct. 24).
    • Escrow requirements for premiums and fees, subject to statutory exceptions.
    • Regulatory requirement for flood insurance for a structure that is part of a residential property in a flood area, if the structure is detached and not used as a residence, although lenders may so require.
    • Regulations implementing provisions of the Biggert-Waters Act still to come.
    • Proposal available at http://www.federalreserve.gov/newsevents/press/bcreg/20141024a.htm.
    • Comment deadline: 60 days after publication in the Federal Register.

Mobile Banking

  • NY Times reports that Rite Aid and CVS have disabled Apple Pay in their stores, in favor of a different system, CurrentC, developed by a consortium of large merchants known as Merchant Customer Exchange (MCX) (Oct. 27).
    • CurrentC will be linked to debt and other bank accounts, as well as gift cards, but apparently not to credit card accounts.
    • Information on CurrentC available at http://www.mcx.com/.

Mortgage Lending

  • CFPB finalizes rules on resolution of errors on points and fees and servicing by nonprofit organizations (Oct. 22).

Operation Choke Point

Payments Systems

Privacy

Too Big to Fail

  • Federal Reserve issues scenarios for 2015 capital planning and stress testing cycle (Oct. 23).  Among other factors:
    • "The baseline scenario for the United States is for a sustained, moderate expansion in economic activity. Real GDP grows at an average rate of just under 3 percent per year over the scenario; the unemployment rate declines modestly, reaching 5¼ percent by the end of the scenario in the fourth quarter of 2017; and CPI inflation averages just over 2 percent per year.”
    • "In the adverse scenario, the United States experiences a mild recession that begins in the fourth quarter of 2014 and lasts through the second quarter of 2015.  During this period, the level of real GDP falls approximately ½ percent relative to its level in the third quarter of 2014 and the unemployment rate increases to just over 7 percent. At the same time, the U.S. economy experiences a considerable rise in core inflation that results in a headline CPI inflation rate of 4 percent by the third quarter of 2015; headline inflation remains elevated thereafter.  Short-term interest rates rise quickly as a result, reaching a little over 2½ percent by the end of 2015 and 5¼ percent by the end of 2017. Longer-term Treasury yields increase by less, resulting in a yield curve throughout the scenario period that is both higher and flatter relative to the baseline. Corporate financial conditions tighten, reflecting both higher long-term Treasury yields and somewhat wider investment-grade corporate bond spreads. Household financial conditions are assumed to tighten broadly in line with movements in similar-maturity Treasury yields."
    • "The severely adverse scenario for the United States is characterized by a deep and prolonged recession in which the unemployment rate increases by 4 percentage points from its level in the third quarter of 2014, peaking at 10 percent in the middle of 2016. In terms of both the peak level reached by the unemployment rate and its total increase, this shock is of a similar magnitude to those experienced in severe U.S. contractions during the past half-century.  By the end of 2015, the level of real GDP is approximately 4½ percent lower than its level in the third quarter of 2014; it begins to recover thereafter.  Despite this decline in real activity, higher oil prices cause the annualized rate of change in the CPI to reach 4¼ percent in the near term, before subsequently falling back."
    • Materials available at http://www.federalreserve.gov/newsevents/press/bcreg/20141023a.htm.
    • OCC and FDIC issue related scenarios for state banks with more than $10 billion in assets.
  • "Financial Stability: Progress and Challenges," Remarks by Treasury Office of Financial Research Director Berner at the Money Marketeers of New York University (Oct. 16).
    • Three themes that, alone, "might not cause financial stability concerns.  Taken together, however, they deserve close monitoring.
      • Persistently low interest rates and low market volatility have prompted increased risk taking in many asset classes and venues.
      • The recent decline in market liquidity, if it continues, may amplify and transmit stress across the financial system.
      • Vulnerabilities in short-term, wholesale funding markets make them prone to fire sales and runs.
    • Text of remarks available at http://www.treasury.gov/initiatives/ofr/news/Pages/default.aspx.

Bank Closings

Congressional Action

  • Letter from Senate Banking Committee Chairman and Ranking Member to bank regulators on cybersecurity issues. See Cybersecurity above.
  • Letters from House Republicans to DoJ and FDIC IGs regarding Operation Check Point.  SeeOperation Check Point above.

Upcoming Events

  • Oct. 28-29
    • OCC director workshops, Credit Risk and Risk Assessment, in Cleveland, OH.
  • Nov. 5-6
    • OCC director workshops, Compliance Risk and Credit Risk: A Director's Focus, in Kansas City, MO.
  • Nov. 6
    • FDIC Interagency CRA Workshop for Banks (Waukesha, WI).
  • Nov. 18-10
    • OCC director workshops, Compliance Risk and Credit Risk: A Director's Focus, in Newton, MA.
  • Nov. 20
    • FDIC San Francisco Region Bankers' Forum, Consumer Protection and Hot Topics.

Regulatory Comment Deadlines

  • Oct. 27 – Federal Reserve: repeal of Regulation AA.  
  • Oct. 28 – FHFA: housing goals for Fannie Mae and Freddie Mac.  
  • Nov. 10 – Federal Reserve/OCC/FDIC: additions to CRA Q&As.  
  • Nov. 10 – HUD: streamlined discussion of refinancing in FHA handbook on single family loans.  
  • Nov. 10 – SEC: circulation of price quotes of security-based swaps that may be purchased only by eligible contract participants not deemed an offer to sell.  
  • Nov. 24 – Federal Reserve/OCC/FDIC/FHFA/Farm Credit Administration: margin requirements for uncleared swaps.  
  • Dec. 2 – CFTC: margin requirements for uncleared swaps for swap dealers and major swap participants.  
  • Dec. 8 – CFPB: definition of "larger participant" in nonbank auto lending market.  
  • 60 days after publication in the Federal Register – Federal Reserve/FDIC/OCC/NCUA/Farm Credit Administration: revisions to flood insurance regulations.  
  • Dec. 23 – FDIC: restrictions on sales of assets by FDIC under part 340.  
  • Jan. 12, 2015 – FHFA: FHLB membership to require 1% of assets in home mortgage loans.