If Regulators Were Football Conferences (An Imaginary Interview)

ABS commentators Jay Bruce and Mikel Dunnagan recently sat down with a representative from Conference CFPB to talk about the upcoming season.

ABS, “As you all know, the new conference alignments have the CFPB, OCC, FDIC, FRB, and NCUA all vying for the big prize. OTS merged, willingly or unwillingly, with the OCC, and CFPB was recently added. We’re here with a representative of the new CFPB Conference. Tell us, what’s it like to be the “new guy on the block””?

CFPB, “We are excited about the privilege and challenge that this new conference brings about. We promise our fans, all fans of regulations, really, that we’ll leave it all on the field, no holding back.”

ABS, “Tell us about how the change came about, you coming in and OTS getting merged.”

CFPB, “Well, we’re only concerned about how well we perform. Yesterday doesn’t matter. How the conferences looked last year won’t determine how well we can compete today.”

ABS, “We understand that CFPB got a lot of money to come aboard this alignment. How much?”

CFPB, “Look, we’re here to compete. The money and all is nice, but the main reason that we formed this conference is the chance to compete with the “big boys” and show everyone that we're for real”.

ABS, “Any idea how the old OTS teams will fare this year?”

CFPB, “At this point, it’s anybody’s guess how they’ll do in the OCC conference, especially since their referees will be calling their games a lot tighter than they are used to.”

ABS, “How have the teams in your new conference responded to you?”

CFPB, “At the heart of it all, they’re predators, I mean, competitors going for the same big prize. There’s going to be some trash talking and jawing; you know it’s coming. Once they get on the field, our referees will be there to make sure the game is played fair…for the little guy…the fan. Our goal as a conference is to make sure that fans out there have fair and equal access to the games and not just limit it to those millionaires and billionaires making over $250,000.”

ABS, “What is toughest on the conference, not having a commissioner, having all new players, animosity from the rest of the conferences?”

CFPB, “Even though the conference is new, we’re all seasoned veterans. We have the best training facilities, the best fans, you know. I’m sure the Commissioner, whoever he or she is, will be the best for the conference and the little guy. This conference didn’t happen by accident. Everything about us was carefully thought out and planned. We’re what “hope” and “change” is all about.”

ABS, “The FRB wrote some proposed rules with the final comments due 2011. When do you think you’ll finalize these?”

CFPB, “Look, we like rules as much or more than the next conference, but we’re not going to be backed into a corner and throw out some arbitrary date. We’ll finalize them when we finalize them. You’ll be the first to know when we apply them retroactively.”

ABS, “Won’t doing that change the scores of the games that have already been played and are in the books?”

CFPB, “Hey, a game’s not over ‘til our Commissioner sings.”

ABS, “How do you think your refs will call big games? Will they over-penalize some teams?”

CFPB, “As Voltaire said of the English, “They occasionally would shoot a general just to get the other’s attention.” That goes for banks, too.”

ABS, “Your primary charge is to regulate the large teams. Are you afraid that the smaller ones are too quick for you, that you can’t handle their speed?”

CFPB, “Look, we can regulate with anyone. Fast, slow, big, small, it doesn’t matter. Once we get going, we can’t be stopped; we won’t be stopped. You've got to either get on our side or get out of the way! One day, there will be on, just one, Super Conference. Then we’ll see who regulating the little guy, I mean the little teams.”

ABS, “And there you have it. Sounds like Conference CFPB has the confidence to make it to the big game this year and for many years to come.”

Hear Ye, Hear Ye...Thoughts on Proclamations

On August 25, 2011, the OCC issued a “Proclamation” authorizing national banks and federal savings associations to close in the “wake” of Hurricane Irene. This got me to thinking on this Friday, August 26…Why a Proclamation?

Proclamation. It sounds so regal, more befitting a King or Queen than a Comptroller (no offense to Comptrollers intended). In fact, a quick search of the Internet confirms this. In former times, and still today, banks in the UK observe holidays so declared by Royal Proclamation.

ROYAL PROCLAMATION. The Bank Holidays Act. 1871, enacted that it shall be lawful for His Majesty, as to His Majesty may seem fit, by proclamation to appoint a special day to be observed as a bank holiday, and any day so appointed shall, as regards bills of exchange and promissory notes, be deemed to be a bank holiday for all the purposes of the Act.

The following is the Royal Proclamation of King George V making December 27th. 1910, a bank holiday:

"We, considering that it is desirable that Tuesday, the Twenty-seventh day of December next, should be observed as a Bank Holiday throughout those parts of Our United Kingdom called England and Wales, and Ireland, and in pursuance of the provisions of ' The Bank Holidays Act, 1871.' do hereby, by, and with the advice of Our Privy Council and in exercise of the powers conferred by the Act aforesaid, appoint Tuesday, the Twenty-seventh day of December next as a special day to be observed as a Bank Holiday throughout England and Wales, and Ireland, and every part thereof, under and in accordance with the said Act, and We do, by this Our Royal Proclamation, command the said day to be so observed, and all his loving subjects to order themselves accordingly.”

Given at Court at St. James's, this Seventh day of November, in the Year of our Lord One thousand nine hundred and ten, and in the first Year of Our Reign.

"GOD SAVE THE KING."

And so, the United States – not to be outdone by our friends across the pond – likes to make “Proclamations” regarding bank closings. In fact, by law, it must be by Proclamation.

12 USC 95(b)(1) says, in part, “In the event of natural calamity, riot, insurrection, war, or other emergency conditions occurring in any State whether caused by acts of nature or of man, the Comptroller of the Currency may designate by proclamation any day a legal holiday for the national banking associations located in that State.”

So, when a proclamation is given to close banks, let us say to ourselves,

“GOD SAVE THE COMPTROLLER.”

How to Read a Regulation

1. First ask your spouse, co-worker, or friend to feel your forehead to see if you are feverish. Often the onset of a catastrophic illness will affect the mind to the point where reading regulatory gibberish becomes a strong desire if not an addiction.
2. Next, acquire a bottle of liquor and take several large drinks.
3. Finally, sit in a straight, comfortable chair in a clean, ventilated, well-lighted place with plenty of freshly sharpened #2 pencils. (Wait a minute, that’s from my college term paper days…never mind)
4. Now, finally, open up the “BOOK OF RULES”.
5. You can find a summary of the regulation near the beginning of the Federal Register’s rendition of the new regulation. You should read this as it’s akin to looking over a course map of a new golf course before you play. You want to get a lay of the land.
6. Understand that you and I think differently than the folks who wrote the “BOOK OF RULES”, so it’s important to understand their language. We, unlike most of them, have actually been in a bank at one time, understand the difference between a debit and a credit, and have seen an actual customer in their native habitat. One of the best ways to understand the language is by reading the definitions contained in the regulation. Most regulations have lots of definitions, and one would think that all the regulations would agree on what the terms “business day” or “dwelling” mean. WRONG! Just like two opposing football teams having guys with the #12 on their jersey, and those two guys with the same number are different people, the same word or phrase in one regulation may mean something different in the regulation you are reading. Don’t presume that you understand what the rule-writer is saying until you learn the language. After reading the regulation’s definitions, you just might find that the regulation doesn’t even apply to your situation.
7. Take a couple more large swigs from your bottle. Tell yourself that you can do this.
8. Curse yourself for not taking that opportunity to go to law school.
9. Read, think, read, think, read, think. Take another swig. Let your eyes glaze over after reading several thirteen line sentences complete with commas, semi-colons, parentheses, double parentheses, brackets, reference citations to multitudes of other places in the regulation, and italicized words.
10. It is now 1:30 a.m. as you curse the government out loud and wake up your spouse, child, or pet.
11. Make a note to call American Bank Systems tomorrow morning and let their team of experts, as Kris Kristofferson so aptly penned it, "Help You Make It Through the Night".

At American Bank Systems and ABS Consulting, we have the tools and expertise to bring sense out of nonsense. We’ll save you time, money, and wear and tear on your liver.

“SAME OLD, SAME OLD” SAYS OCC TO OTS THRIFTS…OR NOT

The OCC Senior Deputy Comptroller Jennifer Kelly, in a recent interview with the ABA, offered the following comments concerning the on-going integration of the OTS into the OCC that warrant further comment.

“We also conducted a series of examinations at both national banks and federal savings associations that were staffed with a combination of examiners from the two agencies earlier this year to help us prepare for the integration.”

According to unofficial reports, this joint endeavor resulted in significant differences in what ratings were to be issued for the institutions examined.  Typically where the OCC examiners opinions were consulted, the suggested ratings for an OTS institution were lower than those where OTS personnel had the final say.  This is to be expected as the OCC has an approach that is less tolerant of component deficiencies in compliance, as opposed to the OTS emphasis on overall and comprehensive conformity to the regulations.  Seeing the forest for the trees approach…or not.

“We do not anticipate any changes in the compliance examination experience for our community banks. As discussed in our thrift outreach sessions and similar to OTS, the OCC integrates consumer compliance work into the safety and soundness examination and issues a single report of examination.”

The changes will be anything but ordinary.  Specifically for small and medium-size institutions as concerning the Risk Assessment process, the changes will be huge.  Moreover, the Consumer Compliance portion of an examination can no longer rest upon it’s isolated standing but will now be mingled with the Safety and Soundness exam, being bruised collectively by the deficiencies in capital and credit standards greatly increased by our current declining economic conditions.  Single report examination thriving like a family who all eat dinner together…or not.

“The Portfolio Manager (PM) for a bank is the examiner who is assigned primary responsibility for the ongoing supervision of that institution… Between exams, the PM monitors performance trends and tracks progress on any Matters Requiring Attention and compliance with outstanding enforcement actions. The PM will touch base with bank management at least quarterly and is the “go-to” person for any questions that a banker or director has between examinations.”

“Ongoing Supervision” takes on new meaning for former OTS institutions.  For those Compliance departments used to an annual or even 18 month examination cycle with little to no examiner contact in the interim, those were the good old days.  Expect quarterly communication with the OCC, the absence of outstanding report issues notwithstanding.  Rather than the OCC Portfolio Manager (PM) being the “go-to” person for interim questions, rest assured the PM will be your “hide-from” person as they investigate and solicit from management what new problems are developing for OCC focus and attention.  Moreover, have a vacant office available for occupancy by an OCC representative who may become your onsite neighbor year-round.  Donuts optional.

A MODERN VERSION OF HOME ON THE RANGE

Dr. Brewster M. Higley penned the words to the 1872 poem which later was set to music as Home on the Range and became the official State Song of Kansas. I offer, in advance, my apologies to him and all Kansans for my brief rendition of “Home on the Range”, with added regulatory language accompaniment. The home ownership rules of Dr. Higley’s time would be much too simple for a complex society such as ours, so vast improvement in the rules had to be made.

Oh, give ( or, at least allow me to qualify for, only as much home as I can reasonably afford when taking into account any balloon payments, variable rate adjustments, and potential income shortfalls that I may encounter in the future and if my consumer credit transaction is secured by my principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling, then additional lending restrictions and disclosures will apply)

me a home (which is defined as a residential real property of twenty-five acres or less upon which there is located or, following settlement, will be constructed, a structure or structures designed principally for occupancy of from one to four families (including individual units of condominiums and cooperatives and including any related interests, such as a share in the cooperative or right to occupancy of the unit); or located or, following settlement, will be placed a manufactured home)

where the Buffalo roam; Where the Deer and the Antelope play; (however, no animal of any kind shall be raised, bred or kept on any portion of a property owner's property for any commercial purpose, but the following species of livestock animals may be kept on a lot: horses, mules, donkeys, llamas. A property owner may keep other species of livestock animals on the property owner's property only as permitted by the Association, and only in accordance and with rules, regulations and standards adopted from time to time by the Board of Directors of the Association.)

Where never is heard a discouraging word, (and you shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application)

And the sky is not clouded all day. (Contrary to the words of the song and given the uncertainty in the regulatory and real estate lending landscapes, the outlook is, as a weather person might say, mostly cloudy.)

With our preeminent compliance software, CompliancePro, compliance consulting services, and compliance training, American Bank Systems and ABS Consulting can help bring sunshine to your clouded real estate lending future and help make sense out of confusing lyrics.

Mikel Dunnagan

Evaluating the Impact of the Proposed Risk Retention

Comprised of nearly 400 pages and requesting responses to close to 200 questions, the April 29, 2011 Credit Risk Retention proposal is overwhelming. In consideration of the enormity of the request, the American Bankers Association has requested an extension of the comment deadline from June 11 until July 22, 2011. Whether the extension request will or will not be honored is yet to be seen; however, prudence dictates that community bankers begin to analyze the impact on their credit activities of the proposal. Of specific concern is whether or not current product offerings, both consumer and commercial, will fall under the category of “qualified” thereby being exempt from the proposed risk retention requirement.

The proposal includes criteria under which the various types of credit are evaluated for the purpose of being “qualified” and, thus, exempt from the risk retention requirements. The criteria proposed for each of the product types fall into the same broad categories, but differ somewhat based on the specific type of credit and borrower. The proposal also provides specific exemptions from risk retention, in general relating to collateral and/or loan guarantee programs.

The process of evaluating the impact on the institution will begin with an inventory of the credit products offered. Clearly those products that meet the exemption based on collateral or guarantee programs can be excluded from further analysis. Similarly, the institution may exclude credit products that will not be sold from the analysis. The remaining credit products will need to be evaluated under the product-specific criteria of qualified credits. In this preliminary analysis a comparison of the proposed thresholds to the institution’s underwriting criteria should be completed and documented.

This analysis provides two results: first, credit products with underwriting standards in contravention of the proposed standards will be identified; second, the process will help to identify criteria may need to be evaluated on a procedural or a loan-by-loan basis. In the first result, for example, a residential purchase money mortgage program including a junior lien to reduce the down payment will absolutely not meet the proposed qualified standard. Under the second, the analysis will identify those criteria under a low-doc loan program where further analysis is needed.

Early identification of the credit products that may be in jeopardy, all be it under proposed criteria, allows management to explore the balance sheet implications of continuing to offer non-qualified products and, if needed, to identify the availability of alternate products to meet the credit needs of their customers. When the criteria is finalized, any changes from the proposed criteria should prove relatively easy to integrate, allowing you to focus on implementing the new products and/or processes you’ll need to continue to serve the credit needs of your customers.

The Proper Care and Feeding of a Risk Assessment

Now that the Board has reviewed and approved the institution’s new or revised risk assessment, it can be shelved until the examiners ask to see it or it’s time for the next annual update, right? Absolutely not! The risk assessment itself provides a snapshot of the institution’s risk profile at a given point in time; but, with proper care and feeding, the risk assessment provides the basis for an ongoing process whereby the institution can monitor its risk profile on an ongoing basis. And, through proper care and feeding, the next annual revision will be a significantly streamlined process.

To increase the power of your risk assessment, begin by implementing a process to update the assessment with the results of your monitoring activities as those results are published. Be sure to incorporate the results of any related audits and regulatory examinations, too. These results, whether validating the effectiveness of existing controls or identifying areas for improvement, impact the institution’s risk profile and provide direction in the effective deployment of scarce resources. If you are using an automated risk assessment tool, this functionality should be available. In a manual process, you’ll need to review and revise the risk and control values associated with those areas covered in the audit, examination, or monitoring reports.

Updating the risk assessment to reflect the impact of new or revised products, services, and regulations is equally important. Establishing a change management process that mirrors your risk assessment process and includes an evaluation of the associated risks and controls allows for easy integration of the results. Feeding these results into your risk assessment increases your ability to manage the institution’s overall risk profile, on a real-time basis. Again, an automated risk assessment tool should include this functionality; in a manual process, the risk and control values associated with the activity will need to be revised as necessary to reflect the change.

In conjunction with these ongoing updates, expanding your risk assessment process to include other key risk indicators enhances your ability to monitor and manage the institution’s level of risk. Risk levels are impacted by various factors, not all of which are associated with a specific change in products, services, or regulations. Defining and monitoring indicators are vital steps to an effective risk management process.

Indicators may be internal, including activities such as training, staffing expertise and sufficiency, effectiveness of management information systems, and customer communications and complaints. Although generally incorporated into the change management process, these indicators should be continually monitored for changes occurring independent of new or revised products, services, or regulations. For example, the departure of key personnel can have a significant impact on risk and will probably occur outside of an event captured by the change management process.

Monitoring external indicators such as economic conditions and industry-wide litigation or enforcement actions will also increase the power of your risk assessment. Re-evaluating risks and controls associated with areas of increased regulatory focus, as identified by an increase in enforcement actions, affords an institution the opportunity to adjust its program to close potential gaps before they pose significant impact.

Clearly, the requirement to implement an effective risk management process is not going away. Institutions devote significant time and effort in performing and documenting their risk assessments. Yet most institutions are not maximizing the value of the risk assessment process. Through proper care and feeding, you can streamline the process and achieve up-to-the minute results from your risk assessment.