By W. Bernard Mason
On Thursday the FDIC Board authorized publication of a proposed statement of policy on qualifications for failed bank acquisitions. This proposed policy statement would provide guidance to private capital investors interested in acquiring or investing in failed insured institutions regarding the terms and conditions for such investments or acquisitions.
The FDIC notes that private capital investors have indicated interest in purchasing insured institutions in receivership. The FDIC recently completed two such resolution transactions involving new private capital investors, stating that the bids from these investors were the least costly to the Deposit Insurance Fund (DIF).
In considering private investments in failed institutions, the FDIC states that it must carefully weigh the potential contribution that investors could make to strengthening the capital position of these banks and the statutory and regulatory framework aimed at: (a) maintaining well capitalized banks; (b) support for these banks when they face difficulties; and, (c) the protections against insider and affiliate transactions. Capital support and management expertise are essential considerations.
These proposed guidelines would apply to: (a) private capital investors in a company that is proposing to directly or indirectly assume deposit liabilities from a failed insured institution in receivership; and (b) applicants for insurance in the case of de novo charters issued in connection with the resolution of failed depository institutions. Under the proposal, these investors would be required to maintain a minimum 15 percent Tier 1 leverage ratio for a period of at least three years; thereafter, the institution’s capital could not decline below the “well capitalized” level during the investors’ ownership. A contractual cross guarantee would be required for commonly owned depository institutions. There would also be a prohibition on extensions of credit to investors, their funds, affiliates, and portfolio companies. Investors would also be required to maintain continuity of ownership through a prohibition on the sale or transfer of their interest in the acquired or de novo institution or its parent holding company for a period of three years. Investors holding ten percent or more of the equity of a bank in receivership would not be eligible to bid to become an investor in that failed institution. Finally, investors generally would be expected to avoid secrecy law jurisdiction vehicles as the channel for their investments.
The FDIC Board is clearly wrestling with how best to encourage private investor interest in acquiring failing institutions while protecting the institution and the DIF from undue risk. Board Member John Dugan expressed his concern that the proposed guidelines may be too onerous, but recognized that some restrictions and limitations were essential. Chairman Sheila Bair stated that the FDIC does not want to see these acquired institutions fail again due to the nature of the acquisition.
The proposed Federal Register document provides the FDIC’s support for each of these provisions, and will be published for a 30-day comment period.
Monday, July 6, 2009
Friday, June 26, 2009
House Holds Hearing on "Enhancing Consumer Financial Products Regulation"
By W. Bernard Mason
On June 24, 2009 the House Financial Services Committee held a hearing to consider the merits of both the Administration's proposal to establish the Consumer Financial Protection Agency and H.R. 1705, the "Financial Product Safety Commission Act of 2009". The Committee heard from three witness panels: the first panel consisted solely of Rep. William Delahunt (D - MA), the co-author of the House bill. Appearing on the second panel were Harvard Professor Elizabeth Warren; William F. Galvin, Secretary of the Commonwealth of Massachusetts; Ellen Seidman, representing the New America Foundation; Edmund Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group; Edward Yingling, President of the American Bankers Association; and, Alex Pollock, representing the American Enterprise Institute. The third panel contained further consumer advocates along with witnesses specifically concerned about federal oversight of insurance industry products and services.
Committee Chairman Barney Frank (D - RI) commenced the hearing by noting his past frustration in getting adequate responses to consumer complaints. In his view, consumer concerns "get crowded out", due to the other safety and soundness responsibilities shouldered by prudential regulators. He observed that when a bank regulator's role is the health of the banks, consumer protection becomes secondary. In his view, the Federal Reserve "has been literally ignoring" its consumer responsibilities. So Chairman Frank believes the proposal to create a separate entity, charged with protecting consumers from abuse, is a very good one.
Ranking Member Spencer Bachus (R - AL) stated that the Administration's proposal outlines fundamental changes to the current regulatory regime. He said the Congress has to consider whether these changes have the potential to reduce consumer choice, limit innovation, and exacerbate the credit crisis. He further stated that the House Republicans have offered a consumer plan that closes gaps in some of the present consumer protection laws by consolidating regulatory and consumer enforcement protection in a single agency and streamlining the complaint process for consumers and investors. He said the Republican plan would also give regulators more investigative and enforcement tools. He further noted that the Republican plan is based on the premise that the best way to protect consumers is not through creation of another bureaucracy accountable to no one, but by consolidating the regulatory system in place today and holding regulators accountable for both consumer protection and safety and soundness regulation. Rep. Bachus said his primary question is the wisdom of bifurcating consumer protection and safety and soundness regulation, as is suggested in the Administration's proposal.
Chairman Frank followed up with comments noting that, in ABA President Yingling's written statement, he says that CRA has not led to material safety and soundness concerns and that such lending is prudent and safe for consumers. Chairman Frank said Mr. Yingling's comments, representing the ABA, were "a very impressive refutation of those who say CRA was a major part of the crisis". (The Republican plan referred to by Rep. Bachus cites CRA as one of the factors contributing to the crisis.) Chairman Frank is concerned about resolving the issue of whether enforcement of CRA should be included within the authority of a new consumer protection agency, or left with the safety and soundness regulators.
Rep. Luis Gutierrez (D - IL) said he wants to be certain that the new agency serves as the primary federal regulator for payday lenders, money remitters, and other money services businesses and that the White House commits to establishing that the agency will aggressively use its supervisory and enforcement powers to regulate these industries.
Most of the minority Committee membership voiced concern over the potential reduction in consumer choice, the increase in regulatory burden for service providers, and the cost of operating yet another federal financial regulatory agency. Most Republican members also shared Rep. Bachus' concerns regarding the separation of consumer protection from prudential supervision. Rep. Jeb Hensarling (R - TX) pointed out that there was not a lack of regulatory authority over consumer protection, but he said an argument could be made that regulatory authority was not properly exercised.
In response to questioning, Elizabeth Warren stated that she did not want to mandate specific products, she merely wants meaningful disclosure of those products that are offered. She wants disclosure to be more effective. She cited the many pages of material required at mortgage loan closings and the fact that borrowers are not given time to review the documents before signing as an example of non-meaningful disclosure. She said separating consumer protection from bank regulation was logical, stating that agencies "are conflicted internally". She pointed to the Federal Reserve's important role in overseeing monetary policy, and indicated that consumer protection had been given a secondary role within that agency.
Rep Mel Watt (D - NC) asked Mr. Yingling how Congress could be assured that the regulators would do an adequate job in the area of consumer protection, given the Federal Reserve's recent record on failure to address issues related to the current crisis. Mr. Yingling responded by saying Congress needed to ensure better agency appointees, better coordination, better laws, and more reporting and accountability to Congress. Mr. Yingling added that it would be unfair to put banks in the middle of two regulators who might be pulling them in two different directions.
Rep. Judy Biggert (R - IL) asked about the concept of consumer responsibility and whether financial literacy might be a key factor in ensuring adequate disclosure. Ms. Warren responded that she was in favor of making products transparent enough so consumers can make informed decisions. "Literacy will not solve the problem of reading a 30-page credit card contract", she said. Mr. Pollack added that "good disclosure enables personal responsibility".Ms. Warren stated her view that the Administration's proposal will help smaller banks - those that were not the cause of the problem. She said the current cost of the compliance burden can be crippling for smaller institutions, so the idea is to "slim-down" the requirements to reduce burden and make them less costly. She further said smaller banks often offer cleaner products, better products; however, markets don't enforce the use of these. Instead, those institutions that can afford multi-million dollar advertising campaigns can force consumers into more complicated, expensive and high-risk products that not only injure consumers, they injure smaller banks. A new regulatory regime would level the playing field not only between bank and consumer but between large and small bank.
Ellen Seidman added that a combination of consolidation and consistency in regulation in one agency will create a preference for quality products that most community banks provide. Mr. Yingling countered that, to his knowledge, there is not a community bank in the country that believes such a statement. In his discussions with banks, Mr. Yingling said that community banks believe creation of a new consumer regulatory agency will mean additional regulation and more examiners. In response to another question, Mr. Yingling stated his view that the Federal Reserve already has the authority necessary for consumer protection; further legislation is unnecessary. Rep. Guttierrez later responded to this point by stating that legislation was passed in 1994 mandating Federal Reserve action in the consumer area, but it took that agency until 2009 to issue regulations.
Mr. Yingling stated a major concern for the ABA is how a new consumer protection agency would interact with state-regulated (and in some cases - unregulated) entities. He pointed out that most of the subprime problems were outside the regulated industry. He is concerned that any new federal regulation "stops at the state line" and places trust in the state regulatory authority. This could subject banks to tough regulation while allowing laxity regarding the unregulated. Professor Warren responded that regulation must shift from "who issued the product" to "what the product is", so there is level regulation.
Responding to a different question, Professor Warren again emphasized that she was not advocating banning products. She pointed out that complicated disclosures don't work, and part of the problem has been caused by a bad regulatory structure. Under the Administration's proposal, the new agency would combine all existing regulatory requirements and create a slimmer, more effective set of regulations that apply across the board to all products. She said this new proposal sets a federal regulatory floor "in response to the fact that the OCC in particular has used its federal power to protect the financial institutions from any effective regulation, including preventing the states from enforcing their own laws on fraud".
Rep. Paul Kanjorski (D - PA) argued that, particularly with respect to the offering of insurance products, a separate consumer protection regulator was a bad idea. He said that "anything that has the title 'consumer' seems to get an express ticket", but he feels this proposal could be very expensive and, regarding the insurance industry, could perhaps impede what some are attempting to achieve - creation of a federal insurance charter.Chairman Frank stated that it is his intention to move for a July mark-up of this proposal. He stated that, ultimately, financial regulatory reform will be consolidated into one final House bill.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
On June 24, 2009 the House Financial Services Committee held a hearing to consider the merits of both the Administration's proposal to establish the Consumer Financial Protection Agency and H.R. 1705, the "Financial Product Safety Commission Act of 2009". The Committee heard from three witness panels: the first panel consisted solely of Rep. William Delahunt (D - MA), the co-author of the House bill. Appearing on the second panel were Harvard Professor Elizabeth Warren; William F. Galvin, Secretary of the Commonwealth of Massachusetts; Ellen Seidman, representing the New America Foundation; Edmund Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group; Edward Yingling, President of the American Bankers Association; and, Alex Pollock, representing the American Enterprise Institute. The third panel contained further consumer advocates along with witnesses specifically concerned about federal oversight of insurance industry products and services.
Committee Chairman Barney Frank (D - RI) commenced the hearing by noting his past frustration in getting adequate responses to consumer complaints. In his view, consumer concerns "get crowded out", due to the other safety and soundness responsibilities shouldered by prudential regulators. He observed that when a bank regulator's role is the health of the banks, consumer protection becomes secondary. In his view, the Federal Reserve "has been literally ignoring" its consumer responsibilities. So Chairman Frank believes the proposal to create a separate entity, charged with protecting consumers from abuse, is a very good one.
Ranking Member Spencer Bachus (R - AL) stated that the Administration's proposal outlines fundamental changes to the current regulatory regime. He said the Congress has to consider whether these changes have the potential to reduce consumer choice, limit innovation, and exacerbate the credit crisis. He further stated that the House Republicans have offered a consumer plan that closes gaps in some of the present consumer protection laws by consolidating regulatory and consumer enforcement protection in a single agency and streamlining the complaint process for consumers and investors. He said the Republican plan would also give regulators more investigative and enforcement tools. He further noted that the Republican plan is based on the premise that the best way to protect consumers is not through creation of another bureaucracy accountable to no one, but by consolidating the regulatory system in place today and holding regulators accountable for both consumer protection and safety and soundness regulation. Rep. Bachus said his primary question is the wisdom of bifurcating consumer protection and safety and soundness regulation, as is suggested in the Administration's proposal.
Chairman Frank followed up with comments noting that, in ABA President Yingling's written statement, he says that CRA has not led to material safety and soundness concerns and that such lending is prudent and safe for consumers. Chairman Frank said Mr. Yingling's comments, representing the ABA, were "a very impressive refutation of those who say CRA was a major part of the crisis". (The Republican plan referred to by Rep. Bachus cites CRA as one of the factors contributing to the crisis.) Chairman Frank is concerned about resolving the issue of whether enforcement of CRA should be included within the authority of a new consumer protection agency, or left with the safety and soundness regulators.
Rep. Luis Gutierrez (D - IL) said he wants to be certain that the new agency serves as the primary federal regulator for payday lenders, money remitters, and other money services businesses and that the White House commits to establishing that the agency will aggressively use its supervisory and enforcement powers to regulate these industries.
Most of the minority Committee membership voiced concern over the potential reduction in consumer choice, the increase in regulatory burden for service providers, and the cost of operating yet another federal financial regulatory agency. Most Republican members also shared Rep. Bachus' concerns regarding the separation of consumer protection from prudential supervision. Rep. Jeb Hensarling (R - TX) pointed out that there was not a lack of regulatory authority over consumer protection, but he said an argument could be made that regulatory authority was not properly exercised.
In response to questioning, Elizabeth Warren stated that she did not want to mandate specific products, she merely wants meaningful disclosure of those products that are offered. She wants disclosure to be more effective. She cited the many pages of material required at mortgage loan closings and the fact that borrowers are not given time to review the documents before signing as an example of non-meaningful disclosure. She said separating consumer protection from bank regulation was logical, stating that agencies "are conflicted internally". She pointed to the Federal Reserve's important role in overseeing monetary policy, and indicated that consumer protection had been given a secondary role within that agency.
Rep Mel Watt (D - NC) asked Mr. Yingling how Congress could be assured that the regulators would do an adequate job in the area of consumer protection, given the Federal Reserve's recent record on failure to address issues related to the current crisis. Mr. Yingling responded by saying Congress needed to ensure better agency appointees, better coordination, better laws, and more reporting and accountability to Congress. Mr. Yingling added that it would be unfair to put banks in the middle of two regulators who might be pulling them in two different directions.
Rep. Judy Biggert (R - IL) asked about the concept of consumer responsibility and whether financial literacy might be a key factor in ensuring adequate disclosure. Ms. Warren responded that she was in favor of making products transparent enough so consumers can make informed decisions. "Literacy will not solve the problem of reading a 30-page credit card contract", she said. Mr. Pollack added that "good disclosure enables personal responsibility".Ms. Warren stated her view that the Administration's proposal will help smaller banks - those that were not the cause of the problem. She said the current cost of the compliance burden can be crippling for smaller institutions, so the idea is to "slim-down" the requirements to reduce burden and make them less costly. She further said smaller banks often offer cleaner products, better products; however, markets don't enforce the use of these. Instead, those institutions that can afford multi-million dollar advertising campaigns can force consumers into more complicated, expensive and high-risk products that not only injure consumers, they injure smaller banks. A new regulatory regime would level the playing field not only between bank and consumer but between large and small bank.
Ellen Seidman added that a combination of consolidation and consistency in regulation in one agency will create a preference for quality products that most community banks provide. Mr. Yingling countered that, to his knowledge, there is not a community bank in the country that believes such a statement. In his discussions with banks, Mr. Yingling said that community banks believe creation of a new consumer regulatory agency will mean additional regulation and more examiners. In response to another question, Mr. Yingling stated his view that the Federal Reserve already has the authority necessary for consumer protection; further legislation is unnecessary. Rep. Guttierrez later responded to this point by stating that legislation was passed in 1994 mandating Federal Reserve action in the consumer area, but it took that agency until 2009 to issue regulations.
Mr. Yingling stated a major concern for the ABA is how a new consumer protection agency would interact with state-regulated (and in some cases - unregulated) entities. He pointed out that most of the subprime problems were outside the regulated industry. He is concerned that any new federal regulation "stops at the state line" and places trust in the state regulatory authority. This could subject banks to tough regulation while allowing laxity regarding the unregulated. Professor Warren responded that regulation must shift from "who issued the product" to "what the product is", so there is level regulation.
Responding to a different question, Professor Warren again emphasized that she was not advocating banning products. She pointed out that complicated disclosures don't work, and part of the problem has been caused by a bad regulatory structure. Under the Administration's proposal, the new agency would combine all existing regulatory requirements and create a slimmer, more effective set of regulations that apply across the board to all products. She said this new proposal sets a federal regulatory floor "in response to the fact that the OCC in particular has used its federal power to protect the financial institutions from any effective regulation, including preventing the states from enforcing their own laws on fraud".
Rep. Paul Kanjorski (D - PA) argued that, particularly with respect to the offering of insurance products, a separate consumer protection regulator was a bad idea. He said that "anything that has the title 'consumer' seems to get an express ticket", but he feels this proposal could be very expensive and, regarding the insurance industry, could perhaps impede what some are attempting to achieve - creation of a federal insurance charter.Chairman Frank stated that it is his intention to move for a July mark-up of this proposal. He stated that, ultimately, financial regulatory reform will be consolidated into one final House bill.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Review and Analysis of Administration Proposal to Create a Consumer Financial Protection Agency
By W. Bernard Mason
Proposal
A major piece of President Obama's financial regulatory reform plan is the proposed creation of a new, separate federal agency to "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". The Administration proposes that this entity should be independent "with stable, robust funding". This agency would have sole rule-making authority for consumer financial protection statutes. It would have supervisory and enforcement authority and jurisdiction over "insured depositories and the range of other firms not previously subject to comprehensive federal supervision". Under this proposal, the agency's rules would serve as a "floor, not a ceiling", permitting the states to adopt and enforce stricter laws, and it would require the agency to coordinate enforcement efforts with the states.
As envisioned in the Administration's proposal, the Consumer Financial Protection Agency (CFPA) would be overseen by a board representing "a diverse set of viewpoints and experiences", with at least one member being the "head of a prudential regulator". Funding is proposed to come "in part from fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of covered products and services".
The proposal would authorize this agency to require that all disclosures and communications with consumers be reasonable, balanced, and clear and conspicuous in their identification of costs, penalties, and risks. The agency would be authorized to define standards for "plain vanilla" products that are simpler and have straightforward pricing, and would be further authorized to require all providers of these services to offer these services prominently, alongside the other products they choose to offer. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, the agency would be authorized to place restrictions on product terms and provider practices. The agency would be authorized to impose appropriate "duties of care" on financial intermediaries. The agency would be responsible for enforcing fair lending laws and the Community Reinvestment Act.
The Administration's proposal would require the CFPA to consider the costs to consumers of existing or new regulations, including any reduction in consumers' access to financial services, as well as the benefits. It would also require the CFPA to review regulations periodically to assess whether they should be strengthened, adjusted, or scaled back. The CFPA would also be required to consult with other federal regulators to promote consistency with prudential, market, and systemic objectives.The CFPA would assume from the federal prudential regulators all responsibilities for supervision of compliance with consumer regulations. The CFPA's jurisdiction would extend to bank affiliates that are not currently supervised by a federal regulator. The CFPA would also have supervisory and enforcement authority over nonbanking institutions, although the states would be viewed as the first line of defense. The CFPA would have the full range of supervisory authorities over nonbanking institutions, including supervision, information collection and on-site examination.The Administration proposes that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. The states would be able to enforce its laws with respect to federally chartered institutions, in coordination with prudential supervisors.
Issues and Obstacles
The first issue to be addressed and settled is whether separation of consumer protection and safety and soundness supervision is a more desirable and effective structure. Many argue that the supervision of bank operations cannot be separated from regulation of the products and services they provide. Federal Reserve Chairman Bernanke, FDIC Chairman Bair, and Comptroller of the Currency Dugan have all publicly stated this view. Supervision by two separate agencies, with differing missions, could put institutions in conflicting positions. Further, adverse observations in one discipline often point to problems in the other; separating these functions could make problem resolution more difficult and less timely. Additionally, creation of another government agency will add further financial burden to the consumer, the service provider, and the taxpayer. A further argument presented is the fear that a single agency focused on consumer protection will stifle innovation in the provision of financial services. Additionally, opponents of the proposal argue that the CFPA would place undue burden on small institutions. Two further arguments have been presented, neither possessing adequate support: (1) the safety and soundness regulators already possess the authority proposed for the CFPA; and, (2) the CFPA would be a redundant layer of bureaucracy. The Administration proposal addresses both of these objections by citing the failure of the current regulatory regime to fully utilize existing authority and by explaining that this action would consolidate and streamline existing consumer protection authority, not duplicate it.
This cost of operation represents a separate issue. If a separate agency were to be created, how would its operations be funded? The Administration calls for a "stable" funding source. Appropriation (the method put forth in H.R. 1705 proposing creation of a Financial Products Safety Commission) could be subject to political manipulation, and would be a further burden on all taxpayers. Some have proposed a fee-based revenue system. This could be either a simple assessment based upon the number of covered accounts or products currently maintained by the service provider, or it could be a transaction-based fee assessed each time a covered product is "sold" or used. Filing fees have been suggested, as well as priced services such as charges for compliance examinations. These fees would be less subject to manipulation, but would present other weaknesses. Assessments or user fees provide regulated entities with leverage over the agency budget. Transaction-based fees can be volatile.
If a new consumer agency were created, remaining issues would be the scope of its jurisdiction; i.e., the entities and products to be covered. One controversial area is the provision of insurance products. A suggestion has been made to include within the CFPA's authority those insurance products that are central or ancillary to credit transactions, such as credit, title, and mortgage insurance. This would provide the agency with jurisdiction over the entire credit transaction. Others argue that the states have effectively regulated the insurance industry and it should be completely excluded from consideration in this proposal, just as investment products under SEC regulation have been. A further argument is one of basic fairness if some products, such as insurance, investments and money market funds, are excluded while banking products are subjected to greater scrutiny.
Another issue will be the scope of the agency's mandate. Disagreement exists as to whether the CFPA should have the authority to restrict or prevent the offering of specific products, or whether it should merely ensure that adequate disclosure of products is achieved. Should the CFPA mandate the offering of "plain vanilla" products, or merely provide a regulatory safe harbor for offering them? Additional resistance exists regarding the concept of setting a federal "floor" on consumer protection, opening the door to increased state supervision and the prospect of a "hodge-podge" of regulations to be addressed by multi-state operators. It also reverses the concept of federal preemption that has particularly consumed the legal staff of the OCC for many years.
A separate concern over CFPA mission and mandate is the issue of CRA review and administration. While the proposal suggests CFPA will have sole authority over CRA, some argue that CRA and safety and soundness are intertwined - having credit and investment being promoted by an entity with no responsibility for safety and soundness could prove to be an unworkable situation. CRA explicitly states that the affirmative obligation to serve is to be exercised "consistent with safe and sound operation". Further, support for community economic development is not a consumer protection issue. Also, the enforcement mechanism for CRA - consideration of the CRA evaluation at the time of a merger, acquisition, etc. - must remain with the prudential supervisor.Clearly, there are issues presented in the Administration's proposal that must be addressed whether a new agency is created or whether consumer protection remains with one or more existing prudential regulators. The concept of regulating products, not providers, would be a departure from past practice. It would introduce the federal regulatory scheme into previously state-regulated or non-regulated entities. Conversely, it would statutorily mandate state regulation and enforcement of consumer protection matters as an "add-on" to federal oversight. It would give a federal imprimatur to certain "plain vanilla" products (perhaps mandate their usage and perhaps require pre-approval of "riskier" products) and potentially introduce a hierarchy of regulatory oversight depending upon the types of products offered by providers. The proposal introduces the possibility of the federal government restricting or banning certain products or dictating their structure. It proposes to oversee the communication occurring between customer and provider.
House Financial Services Committee Chairman Barney Frank has stated that final mark-up of a House bill, addressing the consumer protection aspect of the Administration's proposal, will be completed in July.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Proposal
A major piece of President Obama's financial regulatory reform plan is the proposed creation of a new, separate federal agency to "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". The Administration proposes that this entity should be independent "with stable, robust funding". This agency would have sole rule-making authority for consumer financial protection statutes. It would have supervisory and enforcement authority and jurisdiction over "insured depositories and the range of other firms not previously subject to comprehensive federal supervision". Under this proposal, the agency's rules would serve as a "floor, not a ceiling", permitting the states to adopt and enforce stricter laws, and it would require the agency to coordinate enforcement efforts with the states.
As envisioned in the Administration's proposal, the Consumer Financial Protection Agency (CFPA) would be overseen by a board representing "a diverse set of viewpoints and experiences", with at least one member being the "head of a prudential regulator". Funding is proposed to come "in part from fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of covered products and services".
The proposal would authorize this agency to require that all disclosures and communications with consumers be reasonable, balanced, and clear and conspicuous in their identification of costs, penalties, and risks. The agency would be authorized to define standards for "plain vanilla" products that are simpler and have straightforward pricing, and would be further authorized to require all providers of these services to offer these services prominently, alongside the other products they choose to offer. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, the agency would be authorized to place restrictions on product terms and provider practices. The agency would be authorized to impose appropriate "duties of care" on financial intermediaries. The agency would be responsible for enforcing fair lending laws and the Community Reinvestment Act.
The Administration's proposal would require the CFPA to consider the costs to consumers of existing or new regulations, including any reduction in consumers' access to financial services, as well as the benefits. It would also require the CFPA to review regulations periodically to assess whether they should be strengthened, adjusted, or scaled back. The CFPA would also be required to consult with other federal regulators to promote consistency with prudential, market, and systemic objectives.The CFPA would assume from the federal prudential regulators all responsibilities for supervision of compliance with consumer regulations. The CFPA's jurisdiction would extend to bank affiliates that are not currently supervised by a federal regulator. The CFPA would also have supervisory and enforcement authority over nonbanking institutions, although the states would be viewed as the first line of defense. The CFPA would have the full range of supervisory authorities over nonbanking institutions, including supervision, information collection and on-site examination.The Administration proposes that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. The states would be able to enforce its laws with respect to federally chartered institutions, in coordination with prudential supervisors.
Issues and Obstacles
The first issue to be addressed and settled is whether separation of consumer protection and safety and soundness supervision is a more desirable and effective structure. Many argue that the supervision of bank operations cannot be separated from regulation of the products and services they provide. Federal Reserve Chairman Bernanke, FDIC Chairman Bair, and Comptroller of the Currency Dugan have all publicly stated this view. Supervision by two separate agencies, with differing missions, could put institutions in conflicting positions. Further, adverse observations in one discipline often point to problems in the other; separating these functions could make problem resolution more difficult and less timely. Additionally, creation of another government agency will add further financial burden to the consumer, the service provider, and the taxpayer. A further argument presented is the fear that a single agency focused on consumer protection will stifle innovation in the provision of financial services. Additionally, opponents of the proposal argue that the CFPA would place undue burden on small institutions. Two further arguments have been presented, neither possessing adequate support: (1) the safety and soundness regulators already possess the authority proposed for the CFPA; and, (2) the CFPA would be a redundant layer of bureaucracy. The Administration proposal addresses both of these objections by citing the failure of the current regulatory regime to fully utilize existing authority and by explaining that this action would consolidate and streamline existing consumer protection authority, not duplicate it.
This cost of operation represents a separate issue. If a separate agency were to be created, how would its operations be funded? The Administration calls for a "stable" funding source. Appropriation (the method put forth in H.R. 1705 proposing creation of a Financial Products Safety Commission) could be subject to political manipulation, and would be a further burden on all taxpayers. Some have proposed a fee-based revenue system. This could be either a simple assessment based upon the number of covered accounts or products currently maintained by the service provider, or it could be a transaction-based fee assessed each time a covered product is "sold" or used. Filing fees have been suggested, as well as priced services such as charges for compliance examinations. These fees would be less subject to manipulation, but would present other weaknesses. Assessments or user fees provide regulated entities with leverage over the agency budget. Transaction-based fees can be volatile.
If a new consumer agency were created, remaining issues would be the scope of its jurisdiction; i.e., the entities and products to be covered. One controversial area is the provision of insurance products. A suggestion has been made to include within the CFPA's authority those insurance products that are central or ancillary to credit transactions, such as credit, title, and mortgage insurance. This would provide the agency with jurisdiction over the entire credit transaction. Others argue that the states have effectively regulated the insurance industry and it should be completely excluded from consideration in this proposal, just as investment products under SEC regulation have been. A further argument is one of basic fairness if some products, such as insurance, investments and money market funds, are excluded while banking products are subjected to greater scrutiny.
Another issue will be the scope of the agency's mandate. Disagreement exists as to whether the CFPA should have the authority to restrict or prevent the offering of specific products, or whether it should merely ensure that adequate disclosure of products is achieved. Should the CFPA mandate the offering of "plain vanilla" products, or merely provide a regulatory safe harbor for offering them? Additional resistance exists regarding the concept of setting a federal "floor" on consumer protection, opening the door to increased state supervision and the prospect of a "hodge-podge" of regulations to be addressed by multi-state operators. It also reverses the concept of federal preemption that has particularly consumed the legal staff of the OCC for many years.
A separate concern over CFPA mission and mandate is the issue of CRA review and administration. While the proposal suggests CFPA will have sole authority over CRA, some argue that CRA and safety and soundness are intertwined - having credit and investment being promoted by an entity with no responsibility for safety and soundness could prove to be an unworkable situation. CRA explicitly states that the affirmative obligation to serve is to be exercised "consistent with safe and sound operation". Further, support for community economic development is not a consumer protection issue. Also, the enforcement mechanism for CRA - consideration of the CRA evaluation at the time of a merger, acquisition, etc. - must remain with the prudential supervisor.Clearly, there are issues presented in the Administration's proposal that must be addressed whether a new agency is created or whether consumer protection remains with one or more existing prudential regulators. The concept of regulating products, not providers, would be a departure from past practice. It would introduce the federal regulatory scheme into previously state-regulated or non-regulated entities. Conversely, it would statutorily mandate state regulation and enforcement of consumer protection matters as an "add-on" to federal oversight. It would give a federal imprimatur to certain "plain vanilla" products (perhaps mandate their usage and perhaps require pre-approval of "riskier" products) and potentially introduce a hierarchy of regulatory oversight depending upon the types of products offered by providers. The proposal introduces the possibility of the federal government restricting or banning certain products or dictating their structure. It proposes to oversee the communication occurring between customer and provider.
House Financial Services Committee Chairman Barney Frank has stated that final mark-up of a House bill, addressing the consumer protection aspect of the Administration's proposal, will be completed in July.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Tuesday, June 23, 2009
Recent Interagency Rulemaking
By W. Bernard Mason
The banking agencies have issued the following actions on an interagency basis:
CRA Proposed Rulemaking
The four banking agencies are proposing to amend the Community Reinvestment Act Regulation in two ways. The first amendment would reflect the recent statutory change to the CRA made by the Higher Education Opportunity Act (HEOA) that requires the agencies to consider, as a factor in CRA evaluations, low-cost education loans provided by an institution to low-income borrowers. The second change would be to add a new paragraph to address an existing statutory provision permitting the agencies to consider, as a factor in the CRA evaluation of a non-minority and non-women owned financial institution, activities undertaken by the institution in cooperation with minority-and-women-owned financial institutions and low-income credit unions. This proposal will be published with a 30-day comment period.
Interim Rule on Capital Maintenance: Modified Residential Mortgage Loans
The four banking agencies have approved issuance of this interim rule setting forth that a mortgage loan modified under the Making Home Affordable Program will retain the risk weight assigned to the loan (under the agencies' general risk-based capital rules) prior to the modification, so long as the loan continues to meet other applicable prudential criteria. This interim rule will be effective upon publication and contain a 30-day comment period.
Proposed Interagency Guidance - Funding and Liquidity Risk Management
The agencies have approved publication of this proposed guidance for a 60-day comment period. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, brings them into conformance with the "Principles for Sound Liquidity Risk Management and Supervision" issued by the Basel Committee on Banking Supervision in September 2008. While the Basel document primarily focuses on large internationally active financial institutions, this proposed guidance emphasizes supervisory expectations for all domestic financial institutions.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
The banking agencies have issued the following actions on an interagency basis:
CRA Proposed Rulemaking
The four banking agencies are proposing to amend the Community Reinvestment Act Regulation in two ways. The first amendment would reflect the recent statutory change to the CRA made by the Higher Education Opportunity Act (HEOA) that requires the agencies to consider, as a factor in CRA evaluations, low-cost education loans provided by an institution to low-income borrowers. The second change would be to add a new paragraph to address an existing statutory provision permitting the agencies to consider, as a factor in the CRA evaluation of a non-minority and non-women owned financial institution, activities undertaken by the institution in cooperation with minority-and-women-owned financial institutions and low-income credit unions. This proposal will be published with a 30-day comment period.
Interim Rule on Capital Maintenance: Modified Residential Mortgage Loans
The four banking agencies have approved issuance of this interim rule setting forth that a mortgage loan modified under the Making Home Affordable Program will retain the risk weight assigned to the loan (under the agencies' general risk-based capital rules) prior to the modification, so long as the loan continues to meet other applicable prudential criteria. This interim rule will be effective upon publication and contain a 30-day comment period.
Proposed Interagency Guidance - Funding and Liquidity Risk Management
The agencies have approved publication of this proposed guidance for a 60-day comment period. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, brings them into conformance with the "Principles for Sound Liquidity Risk Management and Supervision" issued by the Basel Committee on Banking Supervision in September 2008. While the Basel document primarily focuses on large internationally active financial institutions, this proposed guidance emphasizes supervisory expectations for all domestic financial institutions.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Adopts Final Rule Changes to Annual Independent Audit Requirements
By W. Bernard Mason
The FDIC has adopted final amendments to its Part 363 (Annual Audit and Reporting Requirements) largely as originally proposed in a notice published on November 2, 2007. The rule will apply to all institutions with consolidated assets of $500 million or more at the beginning of its fiscal year.
Previously, institutions that were holding company subsidiaries could comply with the provisions of Part 363 by relying upon the audit and reporting activities of its parent. The FDIC has determined that, where insured institutions do not comprise a substantial portion of the holding company's consolidated total assets, the holding company's consolidated statements and accompanying notes do not provide sufficient information on the position and operations of the insured entity. Therefore, the FDIC has concluded that, in order for an institution to be eligible to comply with the audit and reporting requirements in Part 363 by looking to the holding company, the consolidated assets of the insured institution(s) must comprise 75 percent or more of the assets of the holding company. Compliance will be required for fiscal years ending on or after June 15, 2010.
The final rule amends the proposal by requiring that, in determining auditor independence, the independent public accountant must look to the AICPA, the SEC, and the PCAOB and comply with whatever standard would be most restrictive. The FDIC has decided not to include in the final rule a proposed requirement that insured institutions file with the FDIC copies of audit engagement letters, but cautions that including "limitations of liability" clauses in such letters could result in supervisory and disciplinary action. The FDIC has also amended some of the proposed guidelines for determining the independence of an outside director.
The final rule will be effective 30 days from the date of publication in the Federal Register. The original proposed rule is available at the here.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
The FDIC has adopted final amendments to its Part 363 (Annual Audit and Reporting Requirements) largely as originally proposed in a notice published on November 2, 2007. The rule will apply to all institutions with consolidated assets of $500 million or more at the beginning of its fiscal year.
Previously, institutions that were holding company subsidiaries could comply with the provisions of Part 363 by relying upon the audit and reporting activities of its parent. The FDIC has determined that, where insured institutions do not comprise a substantial portion of the holding company's consolidated total assets, the holding company's consolidated statements and accompanying notes do not provide sufficient information on the position and operations of the insured entity. Therefore, the FDIC has concluded that, in order for an institution to be eligible to comply with the audit and reporting requirements in Part 363 by looking to the holding company, the consolidated assets of the insured institution(s) must comprise 75 percent or more of the assets of the holding company. Compliance will be required for fiscal years ending on or after June 15, 2010.
The final rule amends the proposal by requiring that, in determining auditor independence, the independent public accountant must look to the AICPA, the SEC, and the PCAOB and comply with whatever standard would be most restrictive. The FDIC has decided not to include in the final rule a proposed requirement that insured institutions file with the FDIC copies of audit engagement letters, but cautions that including "limitations of liability" clauses in such letters could result in supervisory and disciplinary action. The FDIC has also amended some of the proposed guidelines for determining the independence of an outside director.
The final rule will be effective 30 days from the date of publication in the Federal Register. The original proposed rule is available at the here.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Seeks Comment on Extension of Transaction Account Guarantee Program
By W. Bernard Mason
Today the FDIC Board authorized staff to seek comment on two alternatives for phasing out the FDIC's Transaction Account Guarantee (TAG) Program. This program, along with the FDIC's Temporary Liquidity Guarantee Program, was initiated on November 21, 2008 under the Agency's systemic risk authority as a means to assist insured institutions during the current financial crisis. The TAG Program provides a full guarantee for certain noninterest-bearing transaction accounts at a cost of 10 basis points for account balances above the current $250,000 deposit insurance limit. The TAG Program currently will terminate on December 31, 2009.
The first alternative is to retain the original termination date, with no modification to the program. The second alternative will be to extend the termination date to June 30, 2010, with an increase in the assessment to 25 basis points for balances beyond the regular deposit coverage. Under this proposal, institutions would have one opportunity to opt out of the extended program.The FDIC will be publishing the proposal for a 30-day comment period.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Today the FDIC Board authorized staff to seek comment on two alternatives for phasing out the FDIC's Transaction Account Guarantee (TAG) Program. This program, along with the FDIC's Temporary Liquidity Guarantee Program, was initiated on November 21, 2008 under the Agency's systemic risk authority as a means to assist insured institutions during the current financial crisis. The TAG Program provides a full guarantee for certain noninterest-bearing transaction accounts at a cost of 10 basis points for account balances above the current $250,000 deposit insurance limit. The TAG Program currently will terminate on December 31, 2009.
The first alternative is to retain the original termination date, with no modification to the program. The second alternative will be to extend the termination date to June 30, 2010, with an increase in the assessment to 25 basis points for balances beyond the regular deposit coverage. Under this proposal, institutions would have one opportunity to opt out of the extended program.The FDIC will be publishing the proposal for a 30-day comment period.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Chairman Addresses Provisions of Obama Regulatory Reform Plan
By W. Bernard Mason
In a CNBC interview yesterday, FDIC Chair Sheila Bair spoke to some of the key issues contained in the Administration's recently released regulatory restricting proposal. Rather than characterize the proposal as "good", she suggested it was "an opening to the process". She said there was a definite need for reform, and the effort must move forward. She stated that ending "too big to fail" is the most important step in reforming the system, and the way to do that is to have a resolution mechanism that works even for very large entities. This mechanism should also impose market discipline on those who invested or extended credit without doing proper due diligence. This is a central focus of the FDIC in analyzing the proposal.
She said the good news is that a regulatory council has been proposed to oversee systemic risk interests; however, the FDIC wants "a seat at the table regarding decision-making on systemic risk", including input on capital standards and leverage constraints. She indicated the FDIC is currently guaranteeing over $6 trillion in deposits, and the agency has tremendous exposure to the financial system. Therefore, it should have a real say in systemic issues.
Ms. Bair stated that the proposed systemic risk responsibility and the Federal Reserve's existing monetary policy responsibility are two unrelated activities, and most of the developed countries have separated these functions, so this is a legitimate policy issue. Congress will need to look at where this authority and responsibility should be placed.
In her view there has been moral hazard and lack of market discipline created by the "too big to fail" doctrine, and this has been furthered by the lack of a resolution mechanism that can be applied to large financial organizations. Regulation plays a large part, but market discipline also must have an influential role. To the extent there is any sort of implied government back-stop, market discipline is diluted. Ms. Bair believes that in dealing with existing large financial entities, Congress must create a fund (separate from the Deposit Insurance Fund) that can institute risk-based assessments so that those entities that pose higher systemic risks will pay higher assessments. This would create economic disincentives to very large growth.
In her view, true regulatory consolidation would mean removing supervisory authority from all current agencies and placing it under a new entity, and also fold in the SEC and the CFTC. She has been perplexed by the Administration's focus on state charters vs. federal charters as something that needs to be addressed as part of regulatory consolidation. Her position is that the ability to choose between state and federal charters was never a contributing factor to the current crisis. "We've had dual banking for a couple of hundred years, now". The integrity of state charters is important to maintain.
As to whether a restructured regulatory system will protect from future crises, Ms. Bair stated that we will always be subject to business cycles, and this is why having a sound resolution mechanism is extremely important. She believes this should be the key focus for Congress.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
In a CNBC interview yesterday, FDIC Chair Sheila Bair spoke to some of the key issues contained in the Administration's recently released regulatory restricting proposal. Rather than characterize the proposal as "good", she suggested it was "an opening to the process". She said there was a definite need for reform, and the effort must move forward. She stated that ending "too big to fail" is the most important step in reforming the system, and the way to do that is to have a resolution mechanism that works even for very large entities. This mechanism should also impose market discipline on those who invested or extended credit without doing proper due diligence. This is a central focus of the FDIC in analyzing the proposal.
She said the good news is that a regulatory council has been proposed to oversee systemic risk interests; however, the FDIC wants "a seat at the table regarding decision-making on systemic risk", including input on capital standards and leverage constraints. She indicated the FDIC is currently guaranteeing over $6 trillion in deposits, and the agency has tremendous exposure to the financial system. Therefore, it should have a real say in systemic issues.
Ms. Bair stated that the proposed systemic risk responsibility and the Federal Reserve's existing monetary policy responsibility are two unrelated activities, and most of the developed countries have separated these functions, so this is a legitimate policy issue. Congress will need to look at where this authority and responsibility should be placed.
In her view there has been moral hazard and lack of market discipline created by the "too big to fail" doctrine, and this has been furthered by the lack of a resolution mechanism that can be applied to large financial organizations. Regulation plays a large part, but market discipline also must have an influential role. To the extent there is any sort of implied government back-stop, market discipline is diluted. Ms. Bair believes that in dealing with existing large financial entities, Congress must create a fund (separate from the Deposit Insurance Fund) that can institute risk-based assessments so that those entities that pose higher systemic risks will pay higher assessments. This would create economic disincentives to very large growth.
In her view, true regulatory consolidation would mean removing supervisory authority from all current agencies and placing it under a new entity, and also fold in the SEC and the CFTC. She has been perplexed by the Administration's focus on state charters vs. federal charters as something that needs to be addressed as part of regulatory consolidation. Her position is that the ability to choose between state and federal charters was never a contributing factor to the current crisis. "We've had dual banking for a couple of hundred years, now". The integrity of state charters is important to maintain.
As to whether a restructured regulatory system will protect from future crises, Ms. Bair stated that we will always be subject to business cycles, and this is why having a sound resolution mechanism is extremely important. She believes this should be the key focus for Congress.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
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