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2006 Executive Summaries
Final ALLL Policy Statement
Final CRE Guidelines
FDIC Risk-Based Premiums
Deposit Insurance Reform
Interagency Guidance on Nontraditional
Mortgages and CRE Lending
2005 Executive Summaries
Basel II & Basel IA
GSE Reform
Identity Theft Protection Act
Data Security & Identity Theft
Home Equity Lending Guidelines
The Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005
The Sarbanes-Oxley Act
2006
Executive Summary: Final ALLL Policy Statement
December 2006
- The OCC, the FDIC, the Federal Reserve, the OTS, and the NCUA
recently published a revised version of the banking agencies'
1993 policy statement regarding the allowance for loan and lease
losses (ALLL). All revisions were meant to bring policy in line
with current generally accepted accounting principles (GAAP) and
supervisory guidance (published in 2001 and 2004), while continuing
to allow management to exercise discretion. Unlike previous statements,
this policy statement will be applicable to credit unions as well
as banks and thrifts.
- The policy reemphasizes that institutions must have a structured
and well-documented methodology to determine reserve requirements.
The statement stresses that reserve estimates should take into
account all available information, including industry, geographic,
economic, and political factors.
- The agencies state that all institutions have a responsibility
to develop, maintain, and document a "comprehensive, systematic,
and consistently-applied process" for determining both the amount
of ALLL and provisions for loan and lease losses (PLLL).
- Regulators do not want banks to rely upon agency benchmarks
for estimating losses. Instead, individual institutions will be
held responsible for both maintaining an appropriate ALLL model
and documenting all related analyses. ALLL-related policies should
include a comprehensive portfolio analysis, an effective loan
review system, adequate data capture and reporting systems, and
the evaluation of loss estimate models.
- Estimates of losses should reflect all factors that may affect
collectibility. These include changes in lending policies, changes
in loan terms, changes in economic conditions, and other external
factors.
- The guidance also allows for "unallocated" loan loss allowances
when such allowances reflect estimates of probable losses and
are properly supported.
- Management should evaluate the ALLL at the end of each quarter
(at a minimum). This evaluation is subject to review by examiners.
In addition, the board should review all ALLL-related policies
and procedures at least once a year.
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Executive Summary: Final CRE Guidelines
December 2006
- In January 2006, the Fed, the FDIC, the OCC, and the OTS proposed
guidelines for nontraditional mortgages and commercial real estate
(CRE) lending (See Executive Summary: Interagency Guidance on
Nontraditional Mortgages and CRE Lending). Two sets of final guidelines
were published this month: one for thrifts and another for banks
and BHCs. The OTS decided not to specify concentrations thresholds
for thrifts, as these institutions are already subject to limits
on their CRE lending activities. With the exception of the thresholds,
the two sets of guidelines are basically the same.
- The final guidance specifies that its focus is on CRE loans
"where the cash flow from the real estate collateral is the primary
source of repayment" as opposed to loans where "the real estate
is a secondary source of repayment or is taken as collateral through
an abundance of caution." Call reports will be amended in 2007
to show each of these types of CRE loans as a separate line item.
- Institutions should be capable of assessing the concentration
risk in their own portfolios and should be able to identify concentrations
within their own portfolios using detailed information to identify
loans with common risk characteristics (i.e., loans for higher-risk
property types, loans in higher-risk geographic areas, etc.) or
common sensitivities to economic or business developments. The
board and senior management should monitor concentrations, and
institutions should set internal concentration limits.
- Risk management processes at all institutions should be consistent
with their level of risk. The specific guidance offered with regard
to risk management varied little from what had been proposed and
included:
- Greater board management and oversight, including periodic
assessments of the portfolio and the institution's CRE-related
policies.
- Management of portfolio risk as well as individual loan
risk.
- MIS capable of supporting the management of portfolio risk,
the identification/aggregation of an exposure to a particular
borrower, and the stratification of the portfolio by property
type, geographic market, tenant characteristics, developer
concentrations, risk rating, loan structure, loan purpose,
LTV limits, debt service coverage and affiliated loans.
- Market analysis to support the assessment of specific CRE
market conditions.
- The establishment of strong underwriting standards, with
limited exceptions. Regular portfolio stress testing and sensitivity
analysis.
- Regular credit risk review.
- As demonstrated by the above provisions, the final guidelines
emphasize the need for an institution to assess its own level
of risk. The regulators have, however, retained two general concentration
thresholds in order to allow examiners to identify institutions
with a potential exposure. The guidelines note that these thresholds
will be used as a preliminary screen and that greater scrutiny
will depend on additional factors. These thresholds are as follows:
- Total reported loans for construction, land development,
and other land represent 100% or more of total risk-based
capital
- Total commercial real estate loans (CRE, CLD, multifamily,
and unsecured CRE loans) represent 300% or more of total risk-based
capital and the outstanding balance of the CRE loan portfolio
has increased by 50% or more during the prior 36 months
- In general, any institution that recently has experienced a
significant increase in their CRE portfolio can expect to be subject
to greater scrutiny. All institutions will be expected to hold
adequate capital relative to their level of concentration risk.
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Executive Summary: FDIC Risk-Based Premiums
October 2006
- The FDIC Deposit Insurance Reform Act of 2005 required that
the FDIC provide final regulations for deposit insurance assessments
by November 5, 2006. Proposed revised rules for the assessment
of risk-based premiums for deposit insurance were published in
the Federal Register on July 24, 2006. The comment period ended
on September 22, 2006.
- The proposed rules would revise the Federal Deposit Insurance
Act to create different risk differentiation frameworks for smaller
and larger well-capitalized/well-managed institutions, establish
a common risk framework for all other institutions, and establish
a base assessment rate schedule. The Reform Act allows the FDIC's
Board of Directors to price deposit insurance according to risk,
regardless of the level of the fund's reserve ratio.
Proposed Revisions
- The FDIC's current risk-based assessment system places institutions
into one of nine categories based on capital levels and supervisory
ratings. The proposed rules would consolidate these nine categories
into four:
- Risk Category I: CAMELS 1 or 2 and well-capitalized
- Risk Category II: CAMELS 1 or 2 and only adequately capitalized
or CAMELS 3 and at least adequately capitalized
- Risk Category III: CAMELS 1, 2, or 3 and under-capitalized;
CAMELS 4 or 5 and at least adequately capitalized
- Risk Category IV: CAMELS 4 or 5 and under-capitalized
- Category I would correspond to the present highest rating of
1A and would probably contain 95% of all institutions (based on
the number of institutions currently rated 1A).
- Ratings within Category I would be different for large and small
institutions. For small institutions, the assessment rate would
be calculated using CAMELS ratings and current financial ratios,
such as:
- Tier 1 Leverage Ratio
- Loans Past Due 30-89 Days/Gross Assets
- Nonperforming Loans/Gross Assets
- Net Loan Charge-Offs/Gross Assets
- Net Income (before taxes)/Gross Risk-Weighted Assets
- Volatile Liabilities/Gross Assets
- A weighted average of the components of the CAMELS rating
- Comments were requested on whether or not additional ratios
should be included and whether or not a financial-ratios-only
approach would be preferred.
- For larger institutions (those with $10 billion or more in assets),
long-term debt issuer ratings would be used, in addition to CAMELS
ratings. CAMELS ratings would account for 50% of the assessment.
The other half would be split between debt issuer ratings and
financial ratios. The weight given to debt issuer ratings would
increase with bank size; for example, ratings at institutions
with less than $15 million would receive no weight while at institutions
with more than $30 billion, this data would receive a weight of
up to 50%. As the weight assigned to debt issuer ratings increased,
the weight given to financial ratios would decrease. Financial
ratios would therefore only be used in some cases. Large institutions
would then be assigned to one of four subgroups and the FDIC would
have the authority to move an institution among those subgroups
based on new market information.
- All new institutions (those established within the past seven
years) in Risk Category I would be treated identically, regardless
of size and would be assessed the maximum rate applicable to Category
I institutions, or four basis points.
- The FDIC's proposal included a proposed schedule of rates. The
minimum annual rate assessed for Category I institutions would
be two basis points; the maximum (as stated above) would be four
basis points. Category II institutions would be assessed an annual
rate of seven basis points, Category III institutions a rate of
25 basis points, and Category IV institutions a rate of 40 basis
points.
- Some groups, such as the ABA, believe that the two-basis-point
base rate is too high. Since the system is untested, they argue,
the lowest rate assessed initially should be one basis point to
avoid unnecessary costs to banks. The ABA also believes that the
proposed system places too great an emphasis on healthy institutions
and does not focus adequately on institutions that have received
lower CAMELS ratings. Finally, the ABA argues in its comments
that de novo institutions should not all be charged the same rate,
especially since these institutions are generally well-capitalized
and are subject to greater regulatory scrutiny than others.
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Executive Summary: Deposit Insurance Reform
May 2006
- On February 8, 2006, the Federal Deposit Insurance Reform Act
was signed into law by President Bush as part of the Deficit Reduction
Act of 2005. A companion bill, the Federal Deposit Insurance Reform
Conforming Amendments Act of 2005, became law a few days later
on February 15th.
Combining Deposit Funds and Increasing Coverage
- The first provision of the bill - the combination of the deposit
funds - was implemented in March 2006. The existing Bank Insurance
Fund (BIF) and Savings Association Insurance Fund (SAIF) have
been combined into a single Deposit Insurance Fund (DIF) that
both types of institutions may access.
- The bill also raised the insurance limit for retirement accounts
to $250,000 and stated that insurance for these accounts will
be considered separate from that given to deposit accounts held
at the same institution. The general insurance limit will remain
at $100,000 until January 1, 2012.
- Both insurance limits will be indexed to the Personal Consumption
Expenditures Index and will be adjusted in 2010. Additional adjustments
are scheduled to occur every five years and will be made based
on the FDIC and NCUA's joint assessment of economic conditions,
potential problems with banks, and on the probability that the
proposed adjustment would reduce reserves below 1.15%.
Distribution of Credits and Dividends
- The bill contained two provisions to allow the FDIC to distribute
credits and dividends to insured institutions. Banks that paid
into the fund before 1996 will receive a one-time credit that
reflects contributions to the capitalization of the fund. This
credit will amount to 10½ basis points of the combined BIF/SAIF
assessment bases as of year-end 2001 and may be applied against
future premium payments (within certain limits). A total of $4.7
billion in credits will be issued.
- Half of the excess above a 1.35% DIF reserve ratio and all of
the excess above a 1.50% DIF reserve ratio will be declared by
the FDIC as cash dividends, awarded on a historical basis. This
provision is meant to slow the upward growth of the fund and protect
against increased premiums. The FDIC may temporarily suspend or
limit dividends, if needed, when there is a "significant risk"
to the DIF over the next year.
Changes to the Reserve Ratio and Assessment Rates
- The law removes previous provisions that limited the FDIC to
biannual changes in assessment rates and prohibited it from charging
the best risk-rated banks when the reserve ratio was above 1.25%.
It also eliminates the 1.25% deposit reserve ratio and the requirement
that the FDIC maintain that ratio by charging up to 23 basis points.
- Instead, the FDIC is required to establish a restoration plan
within 90 days of determining that the DIF has or will fall below
1.15% within six months. At such a time, the FDIC must charge
premiums to restore the fund within five years and can restrict
the use of credits to no more than 3 basis points.
- Provisions of the new law allow the FDIC to set the DIF's reserve
ratio at any point between 1.15% and 1.50% of insured deposits.
The reserve ratio will be set annually prior to the beginning
of each year. This would allow the FDIC to forgo the imposition
of higher premiums if it believes a decline is temporary.
Implications
- The increase in the level of insurance for retirement accounts
is expected to help banks & thrifts in competing for these products
with nontraditional financial services providers.
- Many small banks argue that the level of insurance on other
deposit accounts should receive a more permanent and fixed increase
rather than simply being indexed to inflation. They believe that
leaving the cap at $100,000 gives customers with high balances
incentive to move their funds to the relative safety of a "too
big to fail" institution.
- The bill gives the FDIC more flexibility with regard to the
reserve ratio of the combined fund. It no longer requires banks
to pay a 23-basis-point premium if the reserve ratio falls below
1.25% of insured deposits.
- The application of the one-time credit will mean that only new
entrants or banks that have experienced high levels of deposit
growth will be required to pay deposit insurance premiums over
the next few years. Because the funds have been adequately capitalized
for the past decade, many newer banks have not yet been required
to pay for deposit insurance.
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Executive Summary: Interagency Guidance on Nontraditional
Mortgages and CRE Lending
January 2006
- The Fed, the FDIC, the OCC, and the OTS continue to express
concern with regards to the increased level of risk being taken
on by institutions through current lending practices. Proposed
guidelines for two new areas - nontraditional mortgages and commercial
real estate (CRE) lending - were published recently in the Federal
Register. Both sets of guidelines are open for comment, and final
guidance is expected in late 2006.
- The main sources of risk for both areas of lending are the recent
increases in demand for these loans and the increased competition
within these two markets. Greater demand has resulted in increasing
concentrations of these loans, while higher levels of competition
have led some institutions to apply weaker qualification and underwriting
standards.
- The recommendations and best practices contained in these guidelines
are fairly similar and are consistent with previous guidance.
Both emphasize the following best practices:
- Institutions should assess adequately a borrower's ability
to repay.
- Institutions should tighten qualification and underwriting
standards and should ensure that all exceptions to these standards
are well documented.
- Portfolios should be managed actively and analyzed frequently.
Stress tests should be performed regularly. To aid in this
analysis, MIS should be improved.
- Institutions should be sure to hold capital at levels above
the regulatory minimum.
- In addition, the nontraditional mortgage guidelines also recommend
increased transparency in marketing and all other communications
with consumers. This clarity is especially important in instances
where negative amortization could occur.
- The CRE guidelines call for increased board oversight and improved
documentation of current and future CRE lending strategies (especially
with regard to the adjustments needed if market conditions change).
- Guidelines for nontraditional mortgages would apply to all institutions
that offer these products, which include interest-only loans,
payment-option ARMs, low-doc loans, and simultaneous second-lien
mortgages. These institutions will have to continue with improvements
to MIS and credit analytics undertaken in response to earlier
retail lending guidance.
- The regulatory agencies have noted that they expect the level
of documentation associated with a loan to correspond directly
to a loan's level of risk. This guideline is open to interpretation
by examiners as a requirement for higher levels of documentation,
which could lead to a decrease in the number of low-doc loans
that are offered.
- The CRE lending guidelines would apply to institutions for which
construction and development loans represent 100% or more of total
equity capital or those for which multifamily, nonfarm/nonresidential,
and construction and development loans combined represent 300%
or more of total equity capital.
- Under these definitions, roughly a quarter of all banks and
thrifts would be required to apply these guidelines, according
to the American Banker. The FDIC has estimated that CRE loans
account for 400% or more of equity capital at 35% of all FDIC-insured
institutions.
- The final CRE guidelines will have the most impact on community
banks, which have recently been relying on CRE lending for growth
and are more likely to have portfolios that are concentrated in
a particular geographic area or industry.
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2005
Executive Summary: Basel II & Basel IA
November 2005
- After meetings with Congress in late September, the Fed announced
that it would publish a Notice of Proposed Rulemaking for Basel
II in the first quarter of 2006 and would delay the phase-in of
the new risk-based capital standards by one year. A 12-month trial
period will begin in 2008. If the trial goes well, the standards
will be phased in gradually beginning in 2009, with final implementation
occurring in 2012. In all phases, implementation at adopting institutions
will be assessed on a case-by-case basis and will not progress
without the approval of an institution's primary regulator.
- Legislators grew concerned after the results of the fourth Quantitative
Impact Study were released in May. At 13 of the 26 institutions
participating in this study, adopting Basel II would result in
a 26% decrease in capital levels. This drop is due, in part, to
the large number of mortgages on the books of these institutions
(under Basel II, capital held against mortgages would be halved).
- The delay is viewed as good news for small banks (who are worried
about the competitive implications of Basel II), but is a set-back
for larger institutions, who have already invested a considerable
amount in data collection and other preparations. All institutions
are concerned about the effect that the delay will have on the
competitiveness of US institutions relative to foreign banks.
- On October 7th, an Advance Notice of Proposed Rulemaking (ANPR)
for Basel IA was published. Basel IA is a set of revisions that
would be applied to the current Basel I system and implemented
by non-Basel II-adopting banks. It would change capital standards
but would be less complex than Basel II. Proposed rules include:
- The addition of four new risk weights;
- Splitting residential mortgages into four risk categories
based on LTVs;
- Using debt-to-income ratios in determining the risk weighting
of mortgages;
- Permitting greater use of external risk weighting;
- Expanding the types of guarantors and collateral that may
be recognized;
- Increasing the amount of capital held against CRE, construction,
and past-due loans and against loans with a maturity of less
than one year;
- Decreasing the amount of capital held against small business
loans.
- The Fed is debating whether or not to allow some smaller, well-capitalized
banks to opt out of both Basel II and Basel IA.
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Executive Summary: GSE Reform
November 2005
- The Federal Housing Finance Reform Act of 2005 (H.R. 1461) was
passed by the House on October 27, 2005 by a vote of 331 to 90.
- The bill's affordable housing provision was altered to prohibit
housing advocacy groups and other organizations involved in voter
registration and election activities from receiving funds. Areas
affected by natural disasters are expected to take precedent over
others. This alteration allowed H.R. 1461 to overcome the Republican
opposition that it originally faced.
- Further action by the Senate has been delayed, however, due
to a lack of support from the administration and from Senate Democrats.
The administration believes that, without strict limits on the
asset portfolios of GSEs, the bill does not adequately address
any systemic risk posed by these holdings. Democrats are mainly
concerned with the alterations that were made to the affordable
housing provision.
- An amendment that would have accomplished the administration's
goal of strict portfolio limits was rejected by the House (by
a vote of 346 to 73). Though H.R. 1461 allows any new regulator
to establish portfolio limits when necessary, opponents are concerned
that the regulator would be hesitant to exert this power due to
the political power of the GSEs themselves.
- Originally introduced in April, the current version of the bill
that will go to the floor contains the following provisions:
- A new regulator would be established with the ability to
adjust minimum capital requirements, impose limits on portfolios,
and put the GSEs into receivership if they were in financial
crisis.
- The new regulator would also have the power to require that
GSEs divest or acquire assets for safety and soundness reasons.
It would be required to review the on-balance and off-balance
assets and liabilities of the GSEs before directing the GSEs
to either divest or acquire assets. This was considered to
be a reasonable alternative to a specific cap on the mortgage
portfolios, as it would allow the regulator to set a limit
that reflected the needs of the market at a given point in
time.
- The regulator would also be required to establish standards
for 11 areas, including internal controls, internal audits,
and asset/portfolio management; as well as anything else that
it deems to be appropriate.
- Once a year, this regulator would be required to report
to Congress about the size and risk implications of the GSEs'
portfolios and justify the size of these holdings.
- It would also be required to define the difference between
primary and secondary market activities before approving any
new products offered by the GSEs.
- A Housing Finance Oversight Board would be created to advise
the regulator.
- The GSEs themselves would see the maximum size of mortgages
eligible for purchase in high-cost areas increased by 50%
to $540,000 or the area's median home price, whichever was
lower.
- The GSEs could continue to use their automated underwriting
systems, but mortgage originations would be specifically defined
in the bill as a primary market activity, and would be off
limits.
- Presidential appointees would be removed from the boards
of Fannie Mae and Freddie Mac. Fannie and Freddie would also
be required to publicly disclose their charitable contributions
and study the amount of sub-prime loans that they purchase.
- The GSEs would also be required to set aside a portion of
their after-tax income for affordable housing over the next
five years. In the next two years, 3.5% of income would be
set aside; this would increase to 5% for the last three years.
- Finally, the Government Accountability Office would be required
to study guarantee fees.
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Executive Summary: Identity Theft Protection
Act
September 2005
Increased Emphasis on Data Security and Protection
Against Identity Theft
In the wake of the dozen security breaches in the first half of
2005, legislation on the issue of data security has been in the
works in both houses of Congress and at the state level. Several
bills intended to supplement existing legislation have been introduced
in Congress. Only one, the Senates Identity Theft Protection
Act, has moved out of committee. Further action is not expected
until late September.
A new federal law is considered highly likely, and it will most
likely include a threshold for notification, preemption of state
laws, and data-broker-specific security standards. During its development,
the prospect of new legislation has raised two key issues for financial
services institutions:
- Data Ownership: It is not clear if a final federal law will
allow consumers to freeze their credit reports and to
exert more control over their personal data. Currently, ten states
allow this, and the Identity Theft Protection Act would make this
a national practice. Credit bureaus oppose any such provision,
because this action would potentially hurt revenues by shifting
control over access to these reports to the consumer. This would
also potentially lessen the ability of lenders to pre-approve
individuals for credit products.
- Increased Compliance Costs: Legislation
would most likely raise operating costs for data brokers and thus
result in higher fees for banks. This would have an impact on
compliance costs, as banks and other financial institutions
use these brokers a great deal to verify data and fulfill the
Customer Identification Program (CIP) requirements of the USA
PATRIOT Act. New notification requirements could also raise costs
for institutions in general. This would have the greatest impact
on small lenders, who do not have the scale of operations required
to defray such costs.
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Executive Summary: Data Security and Identity
Theft
August 2005
- There were twelve instances of disclosure problems during the
first half of 2005. These security breaches - and the adverse
publicity that ensued - have prompted a response by all institutions
and their regulators, as well as a bipartisan legislative effort
in both houses of Congress.
- Currently, the FACT Act, FTC regulations, and Section 501(b)
of the Gramm-Leach-Bliley Act (GLB) address the security of customer
information at the federal level. GLB required that the various
regulatory agencies issue guidelines on information security,
which were first published in February 2001.
- Additional interagency guidelines were issued in March 2005.
These guidelines require that every institution implement a comprehensive
security program and notify customers of unauthorized access to
information in instances where that data has been or will be misused.
- At the state level, California currently has the most comprehensive
laws, with stricter notification requirements, as well as provisions
that allow a consumer to freeze their credit report. Nine other
states also let consumers freeze their data.
- Several bills addressing this issue have been introduced in
both the House and Senate in the past few months; however the
slow speed at which Congress is moving has prompted 23 states
to draft bills of their own concerning customer notification.
- All proposed legislation extends existing rules for banks and
thrifts to data brokers, and would require customer notification
in the instance of "reasonable" or "significant"
risk. One House bill would preempt any existing state laws, while
the Senate bills would preempt only those that were inconsistent
with their provisions. The Identity Theft Protection Act, the
only bill in the Senate to have moved out of committee, would
allow consumers nationwide to freeze their credit reports.
Outlook
- A new federal law is considered highly likely, even though further
action will not come before September. Regulators argue that a
new federal law for institutions under their jurisdiction is unnecessary,
as existing law contains sufficient guidelines for financial services
companies, and simply lacks comprehensive rules for data brokers.
Final legislation will most likely include a threshold for notification,
preemption of state laws, and data-broker-specific security standards.
- Due to PR concerns and a wish to avoid a "patchwork"
of state laws, most financial services institutions support the
implementation of national data security rules.
- Credit bureaus currently oppose the Identity Theft Protection
Act, as provisions allowing consumers to freeze their credit reports
would potentially limit the revenues they gain from controlling
access to these reports.
- Legislation would most likely raise operating costs for data
brokers, and thus result in higher fees for banks. This would
have an impact on expenses, as banks and other financial institutions
use these brokers a great deal to verify data and fulfill the
Customer Identification Program (CIP) requirements of the USA
PATRIOT Act.
- Tighter data security in general would increase expenses, as
the average cost of notification is $30 to $50 per customer, accompanied
by an additional $25 per customer in monitoring costs.
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Executive Summary: Home Equity Lending Guidelines
July 2005
- In their continuing efforts to alert financial institutions
to risks embedded in loan portfolios, the Fed, the OCC, the FDIC,
the OTS, and the NCUA issued interagency guidelines on managing
credit risk in home equity lending on May 16, 2005.
- As with the residential mortgage lending guidance released in
February, the home equity guidelines stressed the importance of
assessing a borrowers ability to repay, especially given
a change in the interest rate environment or the value of collateral.
- The agencies recommended that all institutions take greater
care in marketing, dealing with third-party brokers or originators,
and the use of automatic valuation models. The last was deemed
to be especially important, as differences between such models
can often be used for value-shopping, which results
in the overvaluation of properties.
- For lenders, these guidelines imply a need to enhance risk measurement,
risk monitoring, and management information systems capabilities
and higher compliance costs.
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Executive Summary: The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005
May 2005
- This bill was signed into law on April 20, 2005. Most provisions
will not take effect until October 17, 2005. It is the first significant
reform of bankruptcy laws since the 1970s.
- Currently, individuals can choose to file under either Chapter
7 or Chapter 13 of bankruptcy law. Chapter 7 filers have almost
all of their debt discharged, even if they are capable of repaying
it, while Chapter 13 filers repay all or part of their debt in
installments over 3-5 years.
- The reform introduces a needs-based test for Chapter 7 filers
with incomes greater than the state median.
- The provisions of this law also include new requirements for
consumer lenders, such as disclosures regarding minimum payments,
introductory rates, late payment deadlines and penalties for open-end
lines of credit, and the tax consequences of certain home equity
loans.
- Creditors will also be prohibited from closing open-end loan
accounts solely because a customer had not incurred finance charges.
- In the short-term, the number of filings could increase, resulting
in an increase in non-performing credits and charge-offs. Filings
have consistently increased in the quarter following the introduction
of reform legislation as individuals try to take advantage of
the old system. Less is known about the possible long-term effects
of these reforms.
- This legislation was supported by the financial industry in
general.
- It was opposed by various consumer groups, who argued that it
would result in unnecessary costs for low-income individuals,
and that it does not address the real problem - the ease with
which individuals can obtain credit.
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Executive Summary: The Sarbanes-Oxley Act
February 2005
- Signed into law on July 30, 2002, this act was meant to address
audits, financial reporting and disclosure, conflicts of interest,
and corporate governance at all public companies. It also established
a new supervisory agency for accountants, the Public Company Accounting
Oversight Board (PCAOB).
- Banks are directly subject to this act if they have a class
of securities registered, or if they are required to file reports
under the SEC Act of 1934 (in short, if they are a public banking
organization). Banks with $500 million or more in assets that
are subject to certain portions of the FDIC Act that were amended
by Sarbanes-Oxley must also comply with the portions of the act
that relate to auditor independence.
- The majority of the regulations laid out in Sarbanes-Oxley require
more disclosure and greater auditor independence.
- For example, auditors can no longer provide audit and non-audit
services to a company at the same time, unless such non-audit
services have been pre-approved by an independent audit committee.
- Most attention has been paid to Section 404, which consists
of the following:
- Companies must now verify that they have the proper internal
reporting controls in place. Management must issue a report
on its responsibility over internal controls, the framework
used to evaluate those controls, and an assessment of their
effectiveness.
- The company's external auditor then has to verify management's
report of internal controls.
- There are two main concerns associated with this act: the increase
in compliance costs and the increase in liability for banks.
- For small public banks, these additional compliance costs
could be high enough to drive them into M&As, or to force
them to consider going private. They could also find themselves
at a competitive disadvantage compared with small private
banks.
- Liability becomes an issue, because under Sarbanes-Oxley,
banks no longer have to be the primary actor in securities
fraud in order to be considered at fault, even though they
may not have perfect knowledge of their customers and their
behavior.
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For more information contact Vanessa Mambrino at 202/337-1507 or vmambrino@capitalperfom.com.
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