Tag Archives: Office of the Comptroller of the Currency

Consumer Protection’s Holy Grail

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The Round Table experiences a vision of the Holy Grail by Évrard d'Espinques

The Federal Financial Institutions Examination Council (FFIEC) has issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (the CC Rating System). The FFIEC’s six members represent the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, State Liaison Committee and Consumer Financial Protection Bureau. This veritable roundtable of regulators is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.” (81 F.R. 26553)

I know, I know, this is a deeply technical issued and you are wondering why I am writing about it for a somewhat general audience. The answer is that I think this is a good thing for people to know about: the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.

One of the CC Rating System’s categories is Violations of Law and Consumer Harm. The request for comment notes that over the last few decades, the financial services

industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear. Violations of various laws, including, for example, the Servicemembers Civil Relief Act 5 and Section 5 of the Federal Trade Commission Act, as well as fair lending violations, may potentially cause significant consumer harm and raise serious supervisory concerns. Recognizing this broad array of risks, the proposed guidance directs examiners to consider all violations of consumer laws, based on the root cause, severity, duration, and pervasiveness of the violation. This approach emphasizes the importance of a range of consumer protection laws and is intended to reflect the broader array of risks and the potential harm caused by consumer protection related violations. (81 F.R. 26556)

This is all to the good. A big part of the problem the last time around (pre-Subprime Crisis) was that financial services companies used regulatory arbitrage to avoid scrutiny. Lots of mortgage lending migrated to nonbanks. Nonbanks did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders. (To be clear, Alan Greenspan and other regulators did not do a good job of scrutinizing the banks. But let’s leave that for another post.) With the CFPB now regulating nonbanks and with this coordinated approach to consumer protection, we should expect that regulatory arbitrage will decrease.

If successful, this would amount to a regulatory equivalent of finding the Holy Grail.  So, while this is a technical issue, it is something to feel good about.

Comments due July 4th, so get crackin’!

S&L Flexible Porfolio Lending

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Bailey BrosDepositAccounts.com quoted me in Types of Institutions in the U.S. Banking System – Savings and Loan Associations. It opens,

When you think of a savings and loan, maybe you think of the Bailey Savings & Loan from the movie It’s a Wonderful Life or remember the savings and loan crisis of the 1980s, when more than 1,000 savings and loans with over $500 billion in assets failed.

But there’s much more to the story. Savings and loan associations originally specialized in home-financing, be it a mortgage, home improvements or construction. According to Encyclopedia Britannica, Savings and loan associations originated with the building societies of Great Britain in the late 1700s. They consisted of groups of workmen who financed the building of their homes by paying fixed sums of money at regular intervals to the societies. When all members had homes, the societies disbanded. The societies began to borrow money from people who did not want to buy homes themselves and became permanent institutions. Building societies spread from Great Britain to other European countries and the United States. They are also found in parts of Central and South America. The Oxford Provident Building Association of Philadelphia, which began operating in 1831 with 40 members, was the first savings and loan association in the United States. By 1890 they had spread to all states and territories.

Today, explains, David Bakke, a financial columnist for MoneyCrashers.com, explains how S&Ls have evolved. “More recently, they have also expanded into areas such as car loans, commercial loans and even mutual fund investing. Currently, there isn’t much difference between them and other types of financial institutions.”

S&Ls are a type of thrift institution. Like all financial institutions they are bound to rules and regulations. They can have a state or federal charter. Those with a federal charter are regulated by the Office of the Comptroller of the Currency (OCC). The Office of Thrift Supervision (OTS) used to be the regulator before it was merged with the OCC in 2011.

Another big change that impacted S&Ls was the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). It abolished the Federal Savings and Loan Insurance Corporation, which had provided deposit insurance to savings and loans since 1934. It created two insurance funds, the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF), which were both administered by the FDIC. Those two funds were merged into the Deposit Insurance Fund (DIF) in 2006. In summary, your deposits at S&Ls today are insured by the FDIC.

If you’re wondering how S&Ls work, to put it simply, the money you deposit into your savings account, is used to fund the money the S&L doles out in loans.

Savings and loans have some advantages over other types of institutions. “Many S&Ls keep many of the loans that they originate in their own portfolio instead of selling them off for securitization.  This means that they often have more flexibility in their underwriting criteria than do those lenders that sell off their mortgages to Fannie, Freddie and Wall Street securitizers.  This means that borrowers with atypical profiles or borrowers interested in atypical properties might be more likely to find a lender open to a nontraditional deal in the S&L sector,” says David Reiss, a professor at Brooklyn Law School, that specializes in real estate.

Monday’s Adjudication Roundup

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Banks Should Know Their Investment Risks

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Nathaniel Zumbach

The latest issue of the Federal Deposit Insurance Corporation’s Supervisory Insights (Devoted to Advancing the Practice of Bank Supervision) has an esoteric, but important article on Bank Investment in Securitizations: The New Regulatory Landscape in Brief (starting on page 13). The article opens,

The recent financial crisis provided a reminder of the risks that can be embedded in securitizations and other complex investment instruments. Many investment grade securitizations previously believed by many to be among the lowest risk investment alternatives suffered significant losses during the crisis. Prior to the crisis, the marketplace provided hints about the embedded risks in these securitizations, but many of these hints were ignored. For example, highly rated securitization tranches were yielding significantly greater returns than similarly rated non-securitization investments. Investors found highly rated, high yielding securitization structures to be “too good to pass up,” and many investors, including community banks, invested heavily in these instruments. Unfortunately, when the financial crisis hit, the credit ratings of these investments proved “too good to be true;” credit downgrades and financial losses ensued.

In the aftermath of the financial crisis, interest rates have remained at historic lows, and the allure of highly rated, high-yielding securitization structures remains. Much has been done to mitigate the problems experienced during the financial crisis with respect to securitizations. Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and regulators developed and issued regulations and other guidance designed to increase investment management standards and capital requirements.

The gist of these new requirements is simple: banks should understand the risks associated with the securities they buy and should have reasonable assurance of receiving scheduled payments of principal and interest. This article summarizes the most pertinent of these requirements and provides practical advice on how the investment decision process can be structured so the bank complies with the requirements.

The guidance and regulations applicable to bank investment activities reviewed in this article are: „

  • Office of the Comptroller of the Currency (OCC): 12 CFR, Parts 1, 5, 16, 28, 60; Alternatives to the Use of External Credit Ratings in the Regulations of the OCC;
  • OCC: Guidance on Due Diligence Requirements to determine eligibility of an investment (OCC Guidance);
  • Federal Deposit Insurance Corporation (FDIC): 12 CFR Part 362, Permissible Investments for Federal and State Savings Associations: Corporate Debt Securities;
  • FDIC: 12 CFR Part 324, Regulatory Capital Rules; Implementation of Basel III (Basel III); and  „
  • FDIC: 12 CFR Part 351, Prohibitions on certain investments (The Volcker Rule).

As financial institutions move into an investment world where relying on credit ratings from third party providers is not longer sufficient, the advice in this article is welcome. One wonders though what the consequences will be, if any, for those who do not follow it.

Bank Settlements and the Arc of Justice

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Ron Cogswell

MLK Memorial in DC

Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.

SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.

In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)

Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times?  I don’t think I have my own answer to that question yet, but it is certainly worth considering.

On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.

On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression.  It also wreaked havoc on so many individuals, directly and indirectly.

I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.

Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed.  We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.

 

What Is To Be Done with Mortgage Servicers?

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The Office of the Comptroller of the Currency has found that EverBank; HSBC Bank USA, N.A.; JPMorgan Chase Bank, N.A.; Santander Bank, National Association; U.S. Bank National Association; and Wells Fargo Bank, N.A. have not met all of the requirements of consent orders they had entered into because of deficiencies in how they dealt with foreclosure servicing. The details of these deficiencies are pretty bad.

The OCC recently issued amended consent orders with these banks. The amended orders restrict certain business activities that they conduct. The restrictions include limitations on:

  • acquisition of residential mortgage servicing or residential mortgage servicing rights (does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks);
  • new contracts for the bank to perform residential mortgage servicing for other parties;
  • outsourcing or sub-servicing of new residential mortgage servicing activities to other parties;
  • off-shoring new residential mortgage servicing activities; and
  • new appointments of senior officers responsible for residential mortgage servicing or residential mortgage servicing risk management and compliance.

HSBC had the most deficiencies of the six:  it did not make 45 of the 98 changes it had agreed to over the last few years. I was particularly interested in the portion of the consent orders that relate to MERS. The HSBC consent order states:

(1) The Bank shall implement its Revised Action Plan and ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System (“MERS”) and compliance with MERSCORPS’s membership rules, terms, and conditions (“MERS Requirements”), include, at a minimum:

(a) processes to ensure that all mortgage assignments and endorsements with respect to mortgage loans serviced or owned by the Bank out of MERS’ name are executed only by a certifying officer authorized by MERS and approved by the Bank;

(b) processes to ensure that all other actions that may be taken by MERS certifying officers (with respect to mortgage loans serviced or owned by the Bank) are executed by a certifying officer authorized by MERS and approved by the Bank;

(c) processes to ensure that the Bank maintains up-to-date corporate resolutions from MERS for all Bank employees and third-parties who are certifying officers authorized by MERS, and up-to-date lists of MERS certifying officers;

(d) processes to ensure compliance with all MERS Requirements and with the requirements of the MERS Corporate Resolution Management System (“CRMS”);

(e) processes to ensure the accuracy and reliability of data reported to MERSCORP and MERS, including monthly system-to-system reconciliations for all MERS mandatory reporting fields, and daily capture of all rejects/warnings reports associated with registrations, transfers, and status updates on open-item aging reports. Unresolved items must be maintained on open-item aging reports and tracked until resolution. The Bank shall determine and report whether the foreclosures for loans serviced by the Bank that are currently pending in MERS’ name are accurate and how many are listed in error, and describe how and by when the data on the MERSCORP system will be corrected; and

(f) an appropriate MERS quality assurance workplan, which clearly describes all tests, test frequency, sampling methods, responsible parties, and the expected process for open- item follow-up, and includes an annual independent test of the control structure of the system-to- system reconciliation process, the reject/warning error correction process, and adherence to the Bank’s MERS Plan.

(2) The Bank shall include MERS and MERSCORP in its third-party vendor management process, which shall include a detailed analysis of potential vulnerabilities, including information security, business continuity, and vendor viability assessments.

These should all be easy enough for a financial institution to achieve as they relate to basic corporate practices (e.g., properly certifying officers); basic data management practices (e.g., system-to-system reconciliations); and basic third-party vendor practices (e.g., analyzing potential vulnerabilities of vendors).

It is hard to imagine why these well-funded and well-staffed enterprises are having such a hard time fixing their servicing operations. We often talk about governments as being too poorly run to handle reform of complex operations, but it appears that large banks face the same kinds of problems.

I am not sure what the takeaway is in terms of reform, but it does seem that homeowners need protection from companies that can’t reform themselves while they are under stringent consent orders with their primary regulator for years and years.

Friday’s Government Reports Roundup

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