The Financial Stability Oversight Council has adopted a final rule that went into effect on May 11, 2012 describing the framework that the Council intends to use to determine whether a non-bank financial company is systemically important to the US financial system and whose failure could pose a threat to the U.S. financial stability. The consequences of being designated a systemically important company is that the Federal Reserve is given the authority to impose risk based capital requirements, leverage limits, liquidity requirements, resolution plans, concentration limits, a contingent capital requirement; enhanced public disclosures; short-term debt limits; and overall risk management requirements.
The Council adopted a three-stage process for making its determination. The first stage is designed to narrow the universe of non-bank financial companies by establishing certain size or other quantitative thresholds. The second stage applies the analytic framework (i) size, (ii) interconnectedness, (iii) substitutability, (iv) leverage, (v) liquidity risk and maturity mismatch, and (vi) existing regulatory scrutiny to determine whether company could pose a risk to U.S. financial stability. The third stage will utilize qualitative and quantitative information obtained directly from the companies through the Office of Financial Research.
The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts. Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.” As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest. Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).
The industry is beginning to draw attention to the statutory expiration of this unlimited coverage. As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system. The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework. Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks. Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.
By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets. According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee. The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period. As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000. Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.
The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive. The original FDIC manifestation was optional, with participating banks paying for the coverage. Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process. Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.
Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively. FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of ”systemic risk” justified an exception to the least-cost-resolution requirements of the Act. It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission. We believe there is footing for a similar, transitional extension of the program under this broader authority. In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking. This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it. The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.
Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program. Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q). Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).
The CFPB published its Supervision and Examination Manual (the “Manual”) on October 13, 2011, designed to provide CFPB examiners with direction on how to determine if providers of consumer financial products are complying with consumer protection laws. The CFPB’s press release states that the Manual incorporates procedures already used by other federal regulators. The Manual does simply recite certain interagency procedures, such as for fair lending examinations. At the same time, the Manual addresses new Dodd-Frank concepts, such as unfair, deceptive and abusive acts or practices.
The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”
The CFPB Examination Framework and Philosophy
While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).
Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution: state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.
The Consumer Financial Protection Bureau (CFPB) has moved into its fourth round of testing of a new consumer mortgage loan disclosure. Acting under the mandate of the Dodd-Frank Act, the CFPB is preparing a single, integrated disclosure to address the disclosure requirements of both the Truth in Lending Act and Real Estate Settlement Procedures Act.
The specific focus of this fourth round of testing is comparison shopping. Consumers and the lending industry have been asked to compare two different types of loan products using the same version of the form. The CFPB states that it wants to be sure that the disclosure actually helps consumers to understand the features of competing loan products, from the overall loan amount to estimates of tax and insurance costs.
The CFPB’s efforts in this area have generally met with approval from all interested parties. The proposed form is more clear, concise and informative than either the existing TILA or RESPA disclosures. For example, all of the useless “seller’s column” and “buyer’s column” information on the RESPA good faith estimate has been eliminated in favor of total dollar amounts for the services the consumer can shop for and for the services the consumer cannot shop for. Implementing the new requirements will require systems changes, but we might finally arrive at a disclosure that eliminates useless information, reconciles the differences between TILA and RESPA, and that is easier to explain to borrowers.
Past efforts to reconcile TILA and RESPA disclosures were hampered by the fact that the Federal Reserve had primary regulatory authority for TILA and the Department of Housing and Urban Development had primary authority for RESPA. The Dodd-Frank Act removed this roadblock by transferring these powers to the Bureau.
After almost a year of debate on whether to unwind the legislation and delay its implementation, the Durbin Amendment to the Dodd-Frank Act will soon be implemented by the Federal Reserve Board’s final rule on debit interchange or “swipe” fees. Judie Rinearson explains in flow-chart format how the final rule, most of which takes effect October 1, 2011, applies to prepaid card programs. Her article “The Effect of the Fed’s Final Rule on Your Prepaid Program: The 13 Questions You Must Ask” was originally published by Paybefore.
Final interchange regulations under the Durbin Amendment of the Dodd Frank Act will go into effect October 1, changing the rules for interchange transaction fees. The Bryan Cave Payments team will present a live webinar and Q&A session on Tuesday, August 2, 2011 from 2:00 to 3:00 pm EDT explaining what the new interchange and routing rules mean for the prepaid industry and how to comply.
The Durbin Amendment:
What Does the Final Ruling Mean for Prepaid?
You can register for free online. Attendees are encouraged to submit in advance and without attribution, any questions they would like addressed during the webinar. Please enter your questions when you register.
The Webinar will be presented by Judie Rinearson (Bryan Cave – New York), Linda Odom (Bryan Cave – Washington, D.C.) and Courtney Stolz (Bryan Cave – Washington, D.C.).
CLE credit for this webinar will be available for attendees in California, Georgia, Illinois, New York and Virginia.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, on July 21, the OCC assumed responsibility from the OTS for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations, state and federal. Accordingly, the OCC issued an Interim Final Rule with request for comments that republishes regulations issued by the Office of Thrift Supervision that the OCC has authority to promulgate and enforce as July 21. The rule is effective July 21 and the comment period will close on October 11.
This rule renumbers and issues these former OTS regulations as new OCC regulations, with nomenclature and other technical amendments to reflect OCC supervision of federal savings associations. These newly issued OCC regulations will supersede OTS regulations for purposes of OCC supervision of federal savings associations, as provided by the Act.
This interim final rule is part of a larger OCC review of OCC and OTS regulations to determine what changes are needed for the transition to OCC supervision of federal savings associations. As a continuation of this review, the OCC will consider more comprehensive substantive amendments to these regulations, as appropriate, later this year.
A year ago today, the Dodd-Frank Act was signed into law. Today the Consumer Financial Protection Bureau “stands up,” the Office of Thrift Supervision has 90 days to live, and the Comptroller General’s study on the independence of presidentially appointed inspectors general of certain federal entities was due to Congress (don’t worry if you missed that last one). For many provisions of the Act, the legislation requires that implementing rules were to be finalized by today. As few of the hundreds of required rules have actually been proposed yet alone finalized, there is an argument that those aspects of the law requiring rules by today are not yet effective. Provisions of the law that are certainly effective today:
- Preemption standard for national banks and federal thrifts is altered
- Codification of the requirement that a bank holding company act as a “source of strength” for any subsidiary that is a depository institution
- Federal Reserve is authorized to issue orders and regulations relating to the capital requirements of holding companies
- Heightened capital requirements for interstate acquisitions
- New restrictions on insider asset sales and lending
- Truth in Lending Act exemption threshold for certain credit transactions and consumer leases is increased from $25,000 to $50,000 (i.e., TILA coverage is increased)
- Repeal of Regulation Q and the underlying statute (permitting payment of interest on demand deposit accounts)
- Increase in next-day availability requirement for deposit items not themselves subject to next-day availability under the Expedited Funds Availability Act from first $100 to first $200
- Required credit score disclosure under the Fair Credit Reporting Act where adverse action is based in whole or part on a consumer report
We will continue to follow rulemaking and enforcement of the Act and provide updates linked to our dedicated Dodd-Frank page. Regulators (and Barney Frank) are celebrating the law’s milestone today by testifying before the U.S. Senate on how the Act has improved supervision. Stay tuned.
On June 29, 2011, the Federal Reserve Board approved its final interchange rules, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible interchange fee that an issuer may receive for an electronic debit transactions made with debit cards and general use prepaid cards, codes, and other account access devices.
Under the final rules, issuers are permitted to charge a base fee of 21 cents plus 5 basis points (.05%) multiplied by the full value of the transaction, to cover fraud losses. In addition, a 1 cent per transaction fraud prevention adjustment was also proposed, for those issuers who meet eligibility requirements (such as having fraud prevention and data security policies and procedures in place, which must be updated and certified on an annual basis.) The fraud prevention adjustment rules are new, and are open for comment through September 30, 2011.
Under the new rules, a covered $50 debit or prepaid transaction would have a total possible interchange fee of = 23.5¢ [21¢ + 2.5¢ ($50 x .05 /100) + 1¢], and a $500 transaction would have a total possible interchange fee of = 47¢ [21 ¢ + 25¢ ($500 x.05 /100) + 1¢]. While this is a significant improvement over the original suggested cap of 12¢, it still represents a substantial decrease in interchange revenues for both prepaid and debit card issuers.
Prepaid Industry Gets Some Relief but General Purpose Reloadable Cards Face Unanticipated Restrictions
At a publicly held board meeting on June 29, 2011, the Federal Reserve Board approved its final interchange rule, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible swipe fee an issuer may receive for an electronic debit transactions, adopting routing requirements and applying unanticipated new restrictions to General Purpose Reloadable (GPR) cards to take advantage of the interchange cap exemption. In addition—to the relief of the banking industry—the Fed announced that the rules on pricing requirements will go into effect on Oct. 1, 2011, as opposed to July 21 as dictated by the Durbin Amendment.
Under the final rule, issuers are permitted to charge a base fee of 21 cents (representing 80 percent of an issuer’s average transaction cost), plus five basis points on the full value of the transaction to cover fraud losses (representing the average per-transaction fraud loss of the median issuer). The fraud loss recoupment (referred to by the Fed as an “ad valorem” or “according to value” charge) came as a surprise to most and is viewed as a big win for the banking industry. The Fed also issued an interim final rule that would allow issuers to charge an additional fraud prevention adjustment of one cent if the bank meets, and certifies compliance of, certain security standards. The Fed requested comments on whether the one-cent cap should be adjusted.
In addition, the Fed approved rules governing routing and exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions.
Perhaps the biggest surprise in the final rule is that GPR cards will not benefit from the interchange cap exclusion if they allow funds to be accessed through means other than the card.
Open Board Meeting
At the board meeting, Chairman Ben Bernanke stated that the interchange rule has been one of its most challenging rulemakings under the Dodd-Frank Act to date. The Fed had to consider myriad players impacted by debit interchange, as demonstrated by the more than 11,000 comment letters the Fed received.