Regulatory Developments
FHFA Announces Principal Reduction Program for Struggling Underwater Homeowners
On April 14, the Federal Housing Finance Agency (FHFA) announced a new Principal Reduction Modification Program for seriously delinquent, underwater homeowners. Homeowners whose loans are owned or guaranteed by Fannie Mae and Freddie Mac may apply for the program if they meet certain eligibility criteria, including that the property is owner-occupied, the loan is 90 days or more delinquent as of March 1, 2016, the unpaid principal balance is $250,000 or less, and the mark-to-market loan-to-value (MTMLTV) ratio exceeds 115 percent. The FHFA expects that approximately 33,000 borrowers will be eligible for the program. Servicers must solicit eligible borrowers for the program by October 15, 2016. In addition to introducing the Principal Reduction Modification Program, the FHFA also announced further enhancements to its requirements for the sale of nonperforming loans (NPL), including requiring NPL buyers to evaluate borrowers whose MTMLTV ratio exceeds 115 percent for modifications that include principal reduction and/or arrearages forgiveness, forbidding NPL buyers from walking away from vacant properties; and establishing more specific proprietary loan modification standards for NPL buyers.
Republican Senator Calls for New Studies on GSEs
On April 18, Senate Banking Committee Chairman Richard Shelby (R-Ala.) sent letters to the GAO and the Congressional Budget Office (CBO) requesting that the nonpartisan agencies provide reports to Congress on matters relating to the FHFA and Fannie Mae and Freddie Mac (the GSEs). In particular, Senator Shelby requested a report on the implications of the GSEs being allowed to increase their capital by retaining more of their earnings, expressing concern that allowing the GSEs to retain more earnings "would allow the GSEs to be reconstituted without providing a commensurate reduction in taxpayer exposure to the multi-trillion-dollar housing finance market.”
On April 13, the SEC announced its release of final rules, pursuant to congressional authorization under Dodd-Frank, designed to implement a comprehensive regulatory regime applicable to both “security-based swap dealers” (SBS dealers) and “major security-based swap participants” (MSBSPs) (both being defined in the previously published Exchange Act Release No. 66868, with the latter designation dependent upon an entity’s degree of engagement in swap trading). The rules impose suitability and recordkeeping requirements on SBS dealers and, when dealing with “special entities” (which is defined in the Securities Exchange Act to include (i) federal agencies; (ii) states, their agencies, municipalities, and any other subdivisons thereof; (iii) ERISA employee benefit plans; or (iv) any endowment, including 501(c)(3) entities), subject both SBS dealers and MSBSPs to specific standards of conduct involving risk disclosure, avoidance of conflicts of interest, and other heightened standards of conduct. The final rules were borne out of cooperation between the SEC and CFTC, and most notably have cross-border application – requiring foreign SBS dealers to comply with the rules when transacting with U.S. persons. The final rules become effective 60 days after publication in the Federal Register, except certain aspects of the regulations have an extended 12-month compliance period.
FSOC Issues an Update on its Review of Asset Management Products and Activities
On April 18, the FSOC published an update to its review of asset management products and activities (Update Statement). Since 2014, the FSOC has undertaken a more focused analysis of the asset management industry, including seeking public comment regarding whether and how certain asset management products and activities could pose potential risks to U.S. financial stability. The Update Statement focused on the following areas: (1) liquidity and redemption; (2) leverage; (3) operational functions, in particular service provider concentration; (4) securities lending; and (5) resolvability and transition planning. For each area, the FSOC reviewed the potential risks to financial stability, considered the materiality of the risks and the extent to which market practices or regulation may mitigate them, if at all, and provided its view on how to better respond or understand the potential risks.
That same day, SEC Chair Mary Jo White issued a public statement in support of the FSOC’s Update Statement.
House Passes Bill to Subject FSOC and OFR to Appropriations Process
On April 14, the House of Representatives passed the Financial Stability Oversight Council Reform Act, which would subject the FSOC and the Office of Financial Research (OFR) to the congressional appropriations process in order to provide congressional oversight of the organizations. The organizations are currently funded through assessments on the largest financial institutions. The bill also requires the OFR to (1) submit quarterly reports to Congress regarding its activities; and (2) provide a public notice and comment period of at least 90 days before issuing any report, rule or regulation. Democrats opposed the bill and its prospects in the Senate are unclear.
House Passes Bill to Help Small Banks Raise Capital
On April 14, the House of Representatives passed H.R. 3791, a bill that would raise the asset threshold for the Federal Reserve’s Small Bank Holding Company Policy Statement (Policy Statement) from $1.0 billion to $5.0 billion. Under the Policy Statement, a bank holding company (BHC) or savings and loan holding company (SLHC) that meets certain qualitative criteria (1) is exempt from the FRB’s consolidated risk-based capital and leverage rules and therefore from the new Basel III capital requirements; and (2) may use debt to finance up to 75% of the purchase price of an acquisition and have a debt-to-equity ratio of up to 3:1. Small bank holding companies have used the Policy Statement to raise additional Tier 2 capital at the holding company level and down-stream it to their subsidiary banks as Tier 1 capital. The bill would increase the number of small community bank holding companies to which the Policy Statement applies in order to make it easier for their subsidiary banks “to raise capital so that capital can be turned into local jobs and economic growth.” As reported in the April 13, 2016, edition of the Roundup, the Policy Statement was amended to increase the asset threshold from $500 million to $1.0 billion and apply to SLHCs in April of 2015. Democrats opposed the bill and President Obama has threatened to veto if it is passed by the Senate.
Democratic Senators Call for New GAO Study of Fintech
Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio), Senator Jeff Merkley (D-Ore.) and Senator Jeanne Shaheen (D-N.H.) called on the Government Accountability Office (GAO) to conduct a new study of the Fintech sector. Fintech has grown significantly since the GAO’s previous Fintech study was issued in 2011, when Fintech was focused on peer-to-peer lending. The senators specifically asked the GAO to study the current scope and scale of Fintech lending, potential risks to individual investors, changes in the regulatory framework, differences in regulation of banks and Fintech firms, underwriting practices, disclosure requirements, data security standards and anti-money laundering rules.
OCC Releases Risk Appetite Statement
On April 12, the Office of the Comptroller of the Currency (OCC) released its Risk Appetite Statement, which sets boundaries of acceptable levels of risk in OCC operations. The statement describes nine risk categories (supervision, human capital, strategic, reputation, technology, operational, legal, external and financial) and characterizes the agency’s tolerance for each as low or moderate; high risk is not tolerated for any of the categories. The statement is intended to improve the agency’s governance, increase accountability and enhance overall performance.