Dodd-Frank News Center

OIG Examines Oversight of GSE Business Decisions

This story appeared in Bank Digest.

The FHFA's Office of Inspector General has reported on its audit of the FHFA's process for approving business decisions of government-sponsored enterprises Fannie Mae and Freddie Mac. Although the agency broadly delegated most of its conservatorship authority back to the GSEs in 2008, they are required to obtain FHFA approval for selected business decisions, such as those involving legal settlements over $50 million and risk limit increases.

Money Market Fund Reform Urged

This story appeared in Bank Digest.

Treasury Secretary Tim Geithner has sent a letter to the members of the Financial Stability Oversight Council regarding recent developments in the effort to reform the money market fund industry and address the threats those funds can pose to the stability of the financial system. He urged the council to use its authority under Section 120 of the Dodd-Frank Act to recommend that the Securities and Exchange Commission proceed with money market fund reform.

According to Geithner, without further reform “our financial system will remain vulnerable to runs and instability, which are harmful for retail and institutional investors, businesses that need a reliable source of funding, the MMF industry, and the financial system as a whole.” He asserted that four years after the instability of the money market fund industry contributed to the worst financial crisis since the Great Depression, “with the failure of the SEC to act, the Council should now move forward with the tools provided by Congress.”

Cordray Addresses Inaugural Meeting of Consumer Advisory Board

This story appeared in Bank Digest.

The success of the CFPB “depends on our accessibility to the American public,” stated CFPB Director Richard Cordray in remarks before the inaugural meeting of the bureau's new Consumer Advisory Board on Sept. 27, 2012, in St. Louis, Mo. The board comprises 25 experts from outside the federal government who will provide guidance on issues being addressed by the CFPB as well as trends in the consumer financial marketplace. Members include bank and credit union executives, consumer advocates and community development experts.

The new board will consider questions such as the lingering effects of the financial crisis and the biggest problems facing consumers, credit markets and other markets for consumer financial products or services. According to Cordray, the CFPB's mission is “to be the people's advocate and the people's champion...We want the American public to know that we are listening and we are here to stand on your side.”

Regulators Urged to Assess Basel III Impact on Community Banks

This story appeared in Bank Digest.

Financial regulators are being urged to consider the impact of new Basel III capital standards on community banks and whether they may exacerbate funding challenges already faced by these institutions. A letter from 53 senators to the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency stated that community banks may change their business plans as a result of the new rules, which they fear could reduce lending and economic growth in their communities.

The senators also noted that the proposed rules are extremely complex, requiring the reporting and maintaining of “granular data,” which they assert will increase the compliance burden on community banks. Some banks, the senators argued, may no longer be able to operate because they lack the resources to meet the new compliance obligations. The new capital requirements for the Treasury Department and securities that banks hold in their investment portfolios could also impact how small banks manage liquidity and interest rate risk, the senators said.

 

Bank of America Announces $2.43 Billion Shareholder Settlement

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

Bank of America said it has agreed to pay $2.43 billion to settle a class action lawsuit brought by shareholders in 2009 who held or purchased the bank’s shares at the time it announced plans to acquire Merrill Lynch & Co. Shareholders claimed BoA had made false or misleading statements about the financial health of both institutions.

BoA, which denies the shareholder allegations, also said it would institute certain corporate governance policies. “Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” said BoA chief executive officer Brian Moynihan.

Comment Period on Swap Margin and Capital Proposal Reopened

Federal regulators have reopened the comment period on a proposed rule to establish margin and capital requirements for covered swap entities as required by the Dodd-Frank Act. The proposal, jointly issued by the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Reserve Board, Farm Credit Administration and the Federal Housing Finance Agency, would establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants for which one of the agencies is the prudential regulator.

The agencies generally have adopted a risk-based approach in proposing rules to establish initial and variation margin requirements for covered swap entities, consistent with the statutory requirement that these rules help ensure the safety and soundness of the covered swap entity and be appropriate for the risk to the financial system associated with non-cleared swaps and non-cleared security-based swaps held by covered swap entities. The comment period has been extended to Nov. 26, 2012, to allow interested persons more time to analyze the issues and prepare their comments in light of the advisory document on margin requirements for noncentrally cleared derivatives recently published for comment by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.

CFPB Warns Consumers on Credit Score Variability

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

Consumers should be prepared for the possibility that the credit score they purchase is “meaningfully different” from the score used by a lender to assess their creditworthiness, according to the Consumer Financial Protection Bureau.

“No consumer will know in advance whether the score he or she sees will vary significantly from the score a creditor sees,” the CFPB study released September 25, 2012 stated. According to the report, one out of five consumers would likely receive a meaningfully different score than their creditor, which could result in consumers taking actions that are not in their best interest.

CFPB Drafts Five-Year Plan

This story appeared in Bank Digest.

The CFPB has released a draft five-year strategic plan outlining its goals and strategies. The plan describes how the bureau will focus its resources where it can have the biggest impact.

Bank Executives Charged with Understating Losses During Financial Crisis

This story appeared in Bank Digest.

The SEC has charged three former bank executives in Nebraska with allegedly participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis. The SEC alleges that Gilbert G. Lundstrom, James A. Laphen and Don A. Langford played a role in TierOne Bank, Lincoln, Neb., understating its loan-related losses as well as losses on real estate repossessed by the bank.

TierOne had expanded into riskier types of lending in Las Vegas and other high-growth geographic areas in Arizona and Florida, and the bank was experiencing a significant rise in high-risk problem loans. TierOne's primary banking regulator, the Office of Thrift Supervision, directed TierOne to maintain higher capital ratios as a result of the bank's increase in high-risk problem loans. To appear to comply with the heightened capital requirements, Lundstrom, Laphen and Langford disregarded information showing that the collateral securing certain TierOne loans and real estate repossessed by the bank was overvalued due to the bank's reliance on stale and inadequately discounted appraisals, according to the SEC. The losses were understated by millions of dollars in multiple SEC filings.

Lundstrom and Laphen agreed to settle the SEC's charges as did Lundstrom's son Trevor A. Lundstrom, who is charged with illegally trading on nonpublic information from his father about an anticipated asset sale. The Lundstroms and Laphen agreed to collectively pay nearly $1.2 million in the settlements, which are subject to court approval. The SEC's case continues against Langford.

Freddie Mac's Investment in Inverse Floaters Examined

This story appeared in Bank Digest.

Freddie Mac structures and markets a family of bonds known as collateralized mortgage obligations, which it tailors to the specific interests of investors. According to the FHFA, as investor appetite for floating-rate bonds increased in the spring of 2010, Freddie Mac capitalized on the opportunity to charge a premium for structuring these bonds by carving them out of its securitized mortgages. In the process, it retained by-product variable rate bonds known as inverse floaters.

The FHFA's Office of Inspector General examined Freddie Mac's use of inverse floaters due to concerns that, because the value of inverse floaters decreases when the underlying mortgages are refinanced, Freddie Mac could deliberately limit loan refinancings in order to protect the value of its portfolio. The FHFA-OIG uncovered no evidence that FHFA or Freddie Mac obstructed homeowners' abilities to refinance their mortgages in an effort to influence the yields of inverse floating-rate bonds. It found that inverse floaters represent a small portion of Freddie Mac's capital markets portfolio and that inverse floaters are “no more likely to adversely impact mortgage holders or discourage borrower refinancing than any of the mortgages or other assets that Freddie Mac holds for investment.”