Q2 GDP Announced
On Friday, the Commerce Department released its report on the country’s gross domestic product for the second quarter showing that the GDP grew at an annual rate of 1.3 percent, after having grown at an annual rate of 0.4 percent in the first quarter — a number that itself was revised sharply down from earlier estimates of 1.9 percent.
Senate to Hold CFPB Nomination Hearing
On Thursday, the Senate Banking Committee held a hearing on the nomination of Richard Cordray to be the new Director of the Consumer Financial Protection Bureau. While the nomination can be sent to the floor, Senate Republicans have vowed to block Cordray’s nomination and any other nominees for the directorship because they insist that the agency be run by a Commission rather than a Director and have its funding determined by Congress.
Carper/Blunt Introduce Consumer Data Security Bill
On Thursday, Sens. Tom Carper (D-Dela.) and Roy Blunt (R-Mo.) introduced legislation titled “The Data Security Act of 2011″ which would require entities such as financial establishments, retailers, and federal agencies to safeguard sensitive information, investigate security breaches and notify consumers when there is a substantial risk of identity theft or account fraud. These new requirements would apply to retailers who take credit card information, data brokers who compile private information and government agencies that possess nonpublic personal information.
Senate Nomination Hearings for New Bank Regulators
On Tuesday, the Senate Banking Committee held a hearing to consider the pending nominations for Martin Gruenberg to head the FDIC, Thomas Curry to be Comptroller, and Roy Woodall to be a member of the Financial Stability Oversight Council. Senator Richard Shelby, the Banking Committee’s top Republican, said after the hearing that he would support Gruenberg’s nomination but would need more to review Curry’s record before offering his support. The nominations will now be sent to the floor for full consideration by the Senate.
More Information
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
On May 19, 2011, the Government Accountability Office published its report on the federal banking regulators’ 2006 interagency guidance on commercial real estate concentrations. The GAO report concludes that federal banking regulators should enhance or supplement the 2006 CRE concentration guidance and take steps to better ensure that such guidance is consistently applied.
The GAO report indicates that the OCC and Federal Reserve agree with its recommendations, while the FDIC insists that it has already implemented strategies to supplement the 2006 guidance. A closer review of the OCC and Federal Reserve positions, however, would seem to suggest that the OCC and Federal Reserve agree the 2006 guidance should be enhanced, but don’t seem to have any issue with the inconsistent application of the current guidance, and may even suggest that over-reaching application of the 2006 guidance is necessary since it, in their opinions, doesn’t go far enough. Both the OCC and Federal Reserve indicated that they were reviewing whether higher capital requirements should be set for banks that have higher CRE concentrations.
The GAO report is a good read for any banker looking for the current collective position of the federal regulators with regard to commercial real estate concentrations (and especially with respect to how the 2006 guidance should be interpreted), but ultimately only highlights the discretion vested in each agency (as well as each examiner).
The OCC recently sent a letter to Sen. Tom Carper (D-Dela.) in response to his request for the OCC to clarify how it would interpret particular aspects of the preemption provisions of the Dodd-Frank Act. Among other things, the letter states that federal preemption of state consumer protection laws would continue even under Dodd-Frank, in accordance with the “Barnett” standard. Of particular interest, the OCC letter noted that Dodd-Frank did not overrule or reverse any pre-existing judicial decisions that were based on the Barnett standard and which found that the state law conflicted with bank powers.
The Dodd-Frank Act restricts the ability of national banks and federal savings associations to assert preemption from state consumer protection laws. For example, the ability to assert “field preemption” over an entire body of law (even if there is no conflict) no longer exists. However, contrary to some assertions, preemption is not “dead.” One way preemption would apply is when the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers, as established by the Supreme Court in the Barnett case.
In its letter, the OCC declares that this preemption standard as statutorily referenced in the Dodd-Frank Act is a “directive to apply the conflict preemption standard articulated in the Barnett decision.” However, the letter further adds that the OCC “recognizes that going forward, after the transfer date, the Dodd-Frank Act imposes new procedures and consultation requirements with respect to how [the OCC] may reach future preemption determinations, including the case-by-case requirement…” and specifically mentions that the OCC will be required to first consult with the Consumer Financial Protection Bureau prior to making its determination.
Shutdown Averted, House Passes Budget, Debt Ceiling Vote Next
Last Friday night, Senator Harry Reid (D-NV), Speaker John Boehner (R-OH), and President Obama came to an agreement to fund the federal government for the remainder of the fiscal year, averting a possible shutdown. On Thursday, the House passed the legislation by a bipartisan vote of 260-167. 59 Republicans voted against the bill, and 81 Democrats voted for it. Hours later, the Senate acted with far less suspense but again on a bipartisan 81-19 roll call. With over six months of the current fiscal year already completed, the funding bill reduces the spending level by nearly $38 billion below what it was when the new Congress began in January, making it the largest one-year cut from the President’s budget request in the nation’s history.
This Friday, the House approved a fiscal year 2012 budget resolution drafted by Budget Committee Chairman Paul Ryan (R-WI), which imposes $5.8 trillion in spending cuts over the next decade. The final tally was 235-193, with four Republicans and every Democrat opposing it. The GOP resolution will not be approved by the Senate, and budget resolutions do not go to the president or hold the force of law. However, Ryan has said that the GOP will deem his budget as the ceiling for spending for 2012. For this reason, the most important aspect of the resolution is the allocation it gives to the Appropriations Committee for next year: $1.019 trillion in non-emergency spending. This number will play a big role in a looming spending fight in the fall. If Republicans and Democrats cannot agree on appropriations spending by September 30, the end of the current fiscal year, the government will shutdown.
Congress will now turn to the issue of raising the so-called “debt ceiling,” or the statutory limit on federal debt. The U.S. government had $14.216 trillion in total debt outstanding as of Monday, and the cap is $14.294 trillion. The U.S. Treasury Department released a statement saying the ceiling is projected to be breached in the next 30 days, although it could make adjustments to postpone default until early July. On Thursday, Majority Leader Harry Reid (D-NV) said he wants a clean vote to raise the debt ceiling, but Republicans have insisted they want the vote paired with other budget reform measures.
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OCC Criticizes Durbin Amendment
Last Friday, John Walsh, the Acting Comptroller of the U.S. Currency who oversees regulation of the nation’s largest banks, sent a letter to the Federal Reserve criticizing the Fed’s proposed rule to implement the Wall Street Reform Act’s “Durbin debit card swipe fee” amendment. In the letter, Walsh said the Durbin amendment “takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business. This has long term safety and soundness consequences – for banks of all sizes – that are not compelled by the statute.”
Locke to Leave Commerce for China
On Thursday, President Obama announced that he had chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. Ambassador to China. While the President has yet to announce Locke’s replacement, speculation has centered on the former Mayor of Dallas and current U.S. Trade Representative Ron Kirk.
Attorneys General Mortgage Settlement Stalled
The proposed settlement by state attorneys general with the five biggest U.S. mortgage servicers leaked out this week. The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures. The settlement would be with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and GMAC/Ally Financial Inc. In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states’ attorneys general, predicted that a broad settlement could be reached within about two months. Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default. On Thursday, Rep. Spencer Bachus (R-AL) and Sen. Richard Shelby (R-AL), the top Republicans on the House and Senate banking committees, also criticized the proposed settlement as a “regulatory shakedown.”
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As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Enhancing Financial Institution Safety and Soundness Act of 2010 (the “Act”) shifts regulatory authority from the OTS to the other federal banking regulatory authorities.
The Federal Reserve will become the federal regulator for savings and loan holding companies and their subsidiaries (other than depository institutions) and will have rulemaking authority under Section 11 of the Home Owners’ Loan Act, which generally covers the same types of transactions as currently governed by Regulations O and W as applied to savings associations. The OCC will be charged with regulating federal savings associations and FDIC will pick up regulatory authority over state savings associations. These transfers of power are to occur within one year of the enactment of the Act, subject to a potential 18-month extension if necessary to effectively complete the transition. The OTS will be abolished 90 days after the transfers have been finalized. The OCC and FDIC will work jointly with the OTS to transfer former OTS employees to OCC and FDIC to perform, to the extent practicable, the same functions that the employees performed at the OTS.
All existing OTS orders, resolutions, agreements, regulations and interpretations will continue to be in full force and effect and will be enforced by the Federal Reserve, OCC or FDIC, as applicable, until modified or superseded by the respective regulatory agency. Prior to the official dates of the transfers of power, each of the Federal Reserve, OCC and FDIC will publish a list specifying the former OTS regulations that will be enforced by the respective agency going forward.
While the OTS is being abolished, the federal thrift charter is not affected by the Act. Prior versions of the Act contemplated the elimination of the thrift charter and automatic conversion of federal thrifts into national banks. However, the Act as currently agreed to preserves the federal thrift charter. The authority to grant new thrift charters will be given to the OCC, as noted above, but the Act does not mandate whether new thrift charters should be issued, apparently leaving that to the discretion of the OCC.
Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative. Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment. 4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances. (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.) This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.
What does this mean for the thousands of banks that will not receive funding? They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media. Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come. Together we will both survive the current economic challenges.”
On November 12, 2008, the FDIC, Federal Reserve, OTS, and OCC jointly issued an Interagency Statement on Meeting the Needs of Creditworthy Borrowers. This new release is a broad statement that covers both lending practices and restructuring mortgages and addresses dividend policies and executive compensation. We encourage every bank CEO to carefully review this Interagency Statement as an initial glimpse into the direction that the federal banking regulators appear to be headed.
As we’ve previously noted in our commentary, we believe that any future regulations will be placed on the industry as a whole and not merely on those that participate in the TARP Capital program. We believe this Interagency Statement lends credence to our position. While the Interagency Statement initially notes the Treasury’s program to make new capital widely available, the Interagency Statement provides that “it is imperative that all banking organizations and their regulators work together to ensure the needs of creditworthy borrowers are met,” and that “each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention and reassess the incentive implications of its compensation policies.”
For bankers already planning to participate in the TARP Capital program, this Interagency Statement may provide some guidance (and comfort) as to what the regulators will expect regarding expansion of the flow of credit and modification of residential mortgages.
For bankers who were not planning to participate in the TARP Capital program, this Interagency Statement may lead to a reconsideration of the relative risks of participating versus not participating.
When the Treasury announced the TARP Capital program on October 14, 2008, the program was available to those that “elect to participate before 5:00 pm (EDT) on November 14, 2008.”
On October 31, 2008, Treasury announced that the deadline was only for “publicly traded eligible institutions” and that Treasury would establish “a reasonable deadline for private institutions to apply.”
On November 10, 2008, Interim Assistant Secretary Neel Kashkari stated “The November 14 deadline will be extended for private banks so they have time to apply.”
So to whom does the deadline apply, and what does it mean?
Over the last several days, we’ve had a number of conversations with the federal banking regulators on TARP Capital applications. Although this guidance has not proved to be entirely consistent across agencies, we wanted to pass it along as we have it. We have identified the federal regulatory agency which provided us the guidance, but we generally expect some degree of uniformity across agencies.
In addition to discussing the treatment of non-exchange listed public companies, private companies, and Sub S companies, the Federal Reserve Bank of Atlanta also emphasized that the Treasury Department intends to invest only in entities that are “viable,” with viability being determined on a case-by-case basis. The OCC has separately provided guidance that, as a rule of thumb, an applicant must be viable without the TARP Capital in order to be approved to received TARP Capital. Based on our conversations with regulators last week, we continue to believe the best indicator of viability is the ability of the applicant to earn money operationally, i.e. pre-tax and pre-provision, which is also known as “pre pre” earning).