Read Between the Lines

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

Just in: Must-Read Guide to CFPB

Banking attorneys at Paul Hastings have published a must-read guide to the Consumer Financial Protection Bureau, which has built “a strong record of both supervisory and enforcement activities” since it was created under the Dodd-Frank Act. For instance, it slapped M&T Bank earlier this month with a consent order for deceptively advertising free checking accounts. The bank must refund $2.9 million and pay $200,000 in fines.

The lawyers stress that the CFPB’s enforcement attorneys provide input to the supervisory examination process, routinely meeting with examiners and giving advice. So when should a bank cooperate with the CFPB, which has levied millions in civil money penalties and other fines against banks and other financial service providers? For one thing, the lawyers say, respond to requests for information as fast as possible. That can reduce a civil money penalty, if one is issued. The lawyers caution not to go over CFPB staff to senior officials, except “in truly exceptional circumstances.”

A Strong Risk Culture Starts – and Ends – At the Top

Both Comptroller Thomas J. Curry and New York Fed President William C. Dudley are calling for large banks to improve their risk culture by starting at the top.  Curry wrote a paper in the Clearing House’s Banking Perspective that says the board and senior management of large banks must set the tone for healthy organizations. He emphasized that while community banks also have “improper business practices and deficient risk management systems,” they rarely get the publicity that hurts the industry as a whole. Dudley said in a speech that compensation incentives are often to blame for risky behavior and change must begin at the top. “Risk culture is not easy for regulators to measure,” Curry wrote. “It’s not like credit quality or earnings strength. But it’s important because it has an incredibly powerful influence on the risk decisions and behaviors at all levels of an organization.”

Could Auto Loans Surpass HELOC Risks?

Deputy Comptroller Darrin Benhart, who is in charge of supervision risk management, told the Financial Services and Credit Risk Conference on Oct. 28 that banks have increased auto lending, but they are often focusing more on monthly payments than the overall debt of the borrower. “The results have yet to show large-scale deterioration at the portfolio level, but we are definitely seeing the signs of increasing risk,” he said. One indication of trouble to come:  Bank charge offs for bad auto loans increased 12 percent in 12 months. While regulators have warned of a HELOC crisis, Behart said banks and thrifts have taken the risks to heart, reducing their exposures by $43 billion.  Still, he said, much remains to be done, which is why the banking agencies issued guidance in June on how banks should handle end-of-draw challenges.

Examiners See Signs of Strategic Vulnerability

Regulators from the Fed, the FDIC and the OCC recently told New Jersey banks that they are increasingly seeing signs of strategic vulnerability among community banks.  Banks are seeking alternative ways of increasing shareholder value, and even institutions with more than $1 billion are looking at mergers and acquisitions, hoping for economies of scale.  Competition on lower pools of loans is putting pressure on deals and products, which is hurting margins. Banks are giving up yield to protect against rising interest rates. Staying liquid and having a tighter margin is a prudent approach, one regulator said.

Fed President Blasts Community Bank Regulation

Kansas City Fed President Esther George criticized the state of community bank regulation in her keynote speech at the recent Fed/CSBS conference. She said rules “are increasingly prescriptive and complex’ and even capital rules were too complicated for community banks. “For community bank supervision, the substitution of rigid rules for examiner judgment has altered the supervisory process without adding value and has instead created higher costs of compliance,” she said.