Read Between the Lines

Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.

OCC Reveals Enforcement Statistics

The Office of the Comptroller of the Currency’s 2013 Annual Report always offers a few telling nuggets.  In fiscal year 2013, the OCC issued 43 cease and desist orders, 31 formal agreements, 1 PCA directive, 7 memorandums of understanding and 35 individual minimum capital ratio letters. IMCR letters require banks to maintain capital levels higher than regulatory minimums. If the bank’s capital slips below this requirement, then regulators can mandate a capital plan.

Comptroller Thomas J. Curry highlights capital throughout the annual report, noting that “at the end of the day, the hundreds of community bank  failures that followed the financial crisis came about because they lacked capital of sufficient quantity and quality to weather the storm.” He writes that the new capital rule should help banks avoid such meltdowns in the future. The report also notes that the OCC expects banks to maintain capital “well above regulatory minimum capital ratios, especially during expansionary periods” when risks increase.

Make Sure Your Bank Follows Servicemembers Act, Fed Warns

The Federal Reserve is reminding community banks that examiners will review policies to make sure that the bank is complying with the Servicemembers Civil Relief Act. The Fed’s latest issue of FedLinks reviews the Act, which gives certain rights to the military. Banks, for instance, cannot foreclose on real property during military service or 12 months afterward without a court order.

HELOCs Again in Spotlight

Many community banks have failed to account for a borrower’s ability to service their HELOC lines on an amortizing basis at origination, writes Michael Webb, Managing Examiner, Federal Reserve Bank of Richmond, in the Fed’s Community Banking Connections.  Webb warns that there could be risk in HELOC portfolios as they approach their peak reset years for 2004-2008 vintage originations. Like other bank risks, board members must be kept informed of the bank’s policies and procedures on HELOC exposures.

Underwriting Standards Easing

The OCC’s Annual Survey of Credit Underwriting shows that standards in commercial and retail loan products are easing, primarily though reduced collateral requirements and loosened covenants.  Loan portfolios that eased the most included indirect consumer, credit cards, large corporate, asset-based lending, international, and leveraged loans.  Portfolios that tightened since last year included HLTV home equity and conventional home equity.

Complaints to CFPB Rising

Community banks have viewed the Consumer Financial Protection Bureau with unease since it began operating in 2012. But consumers have embraced it.  Director Richard Cordray told the U.S. Conference of Mayors that the CFPB has been inundated with complaints, from 600 in its first month, to more than 15,000 complaints in December.  About 27,000 complaints have been about credit reporting, 31,000 concern debt collection and more than 109,000 have been about mortgages.

Banks Not Prepared for Stress Testing Requirements

A recent survey from the accounting firm of Crowe Horwath found that just 20 percent of banks with assets ranging from $1 billion to $10 billion were prepared to meet stress testing requirements.  The firm wrote that “it’s likely that even community banks will face mandatory stress-testing requirements in the future” and that failure to comply could “limit all capital actions,” including executive bonuses and dividends.  The survey found that 87 percent of banks were still relying on a “mostly manual process for risk management and governance.”

While stress testing is not mandated for community banks, many regulators have begun to view it as a best practice when it is integrated into strategic planning.