FIS Regulatory Advisory Services Executive Alert
Fall 2009
Click here to view the printable version of the FIS Regulatory Advisory Services Executive Alert.
What's the latest in compliance? Read more to find out. In this edition:
- Is a Consumer Protection "Super Agency" Part of Our Future?
- Calendar of Educational Events
- The Case for a Robust Approach to Credit Stress Testing
- On the Radar - Upcoming Regulatory Deadlines
- Prepare Your Mortgage Lenders for Registration
Who is FIS Regulatory Advisory Services?
FIS Regulatory Advisory Services is a one of the country's leading compliance advisors. Our compliance expertise and outstanding customer service have made us the source that thousands of compliance professionals, including the Federal Reserve, FDIC and OCC, turn to for answers.
Premium Members enjoy our compliance service that features:
- Print and electronic copies of our renowned compliance manual
- Unlimited access to our compliance experts
- Unlimited review of policies, disclosures, advertising
- Significant discounts on training services and reference materials
Is a Consumer Protection "Super Agency" Part of Our Future?
By Walt Young, Senior Compliance Officer
Many have blamed the recent meltdown in the mortgage market, at least in part, on the failure of our current federal regulators to aggressively enforce the nation's consumer protection laws. They argue that the "cure" for this regulatory oversight is the creation of a new consumer protection "super agency." Under proposed HR 3126, financial institution regulators would surrender their consumer compliance rule writing and enforcement activities to the new agency. The new Consumer Financial Protection Agency would be given sole supervisory, examination, and enforcement authority for protecting consumers of financial products with the ability to:
- Regulate the provision of consumer financial products or services under the new Act and existing consumer protection laws.
- Assess annual fees or assessments to recover amounts expended by the Agency.
- Administer a new Consumer Financial Protection Agency Civil Penalty Fund which could be used as a source to compensate consumers injured by regulated entities and which would be funded by the imposition of fines and penalties for violations of consumer protection rules.
- Take administrative actions to prevent persons from committing or engaging in unfair, deceptive, or abusive acts or practices under federal law in connection with any transaction with a consumer for a product or service; ensure that appropriate and effective disclosures and communications are provided to consumers detailing costs, benefits, and risks relating to financial products and services; guide the manner, settings, and circumstances for the provision of products or services to ensure that their risks, costs, and benefits are fully and accurately represented to consumers; and approve pilot disclosures to consumers.
- Define "standard consumer financial products or services" and prescribe regulations or guidance concerning offering them at or before the time an alternative consumer financial product or service is offered.
The new super agency would regulate and have supervisory authority over all entities that are in any way engaged in offering financial products or services to consumers, including organizations currently regulated by the FDIC, the OCC, the OTS, the Federal Reserve, and the NCUA. Its reach would also extend to currently unregulated organizations such as mortgage brokers and MSBs, and it would assume certain consumer protection functions from the Federal Trade Commission. Only consumer protection functions currently handled by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the states with respect to insurance products, would remain outside of the purview of the new super agency.
The new agency would be given unprecedented power and authority. For the first time ever, a federal agency would be given the authority to design and mandate the offering of standardized consumer products and services. While this new agency would undoubtedly "level the playing field" as far as providing an environment in which all regulated organizations would be held to a uniform set of consumer protection standards, never before has a single federal agency been given such overwhelming control over such a crucial segment of the economy.
The financial services industry is engaged in an all out effort to keep the new super agency from being created. The heads of all of the current federal financial regulatory agencies have testified in congressional hearings that they are opposed to the creation of this new agency. We should know by the end of this session of Congress if a new "super agency" will become a part of our future.
Calendar of Educational Events
- 10/6/09 to 10/9/09 - Intermediate Deposit & BSA Compliance and Lending Compliance Seminar - Dallas, TX
- 10/20/09 to 10/23/09 - Intermediate Deposit & BSA Compliance and Lending Compliance Seminar - Nashville, TN
- 10/27/09 to 10/30/09 - Basics Deposit & BSA Compliance and Lending Compliance Seminar - Chicago, IL
- 11/10/09 to 11/13/09 - Masters Deposit & BSA Compliance, and Lending Compliance Seminar - Las Vegas, NV
- 12/8/09 to 12/11/09 - Basics Deposit & BSA Compliance and Lending Compliance Seminar - Orlando, FL
We also have an extensive list of Web conferences and online training on topics such as Regulation GG, Regulation Z and RESPA. A complete list of classes and a schedule of other upcoming events is available at http://www.metavanteregulatoryservices.com/.
The Case for a Robust Approach to Credit Stress Testing
By FIS Credit Risk Services
At its core, credit stress testing guards against unexpected loss. Regulated financial institutions, by the very nature of their business, expect some loss, usually covered by the loan loss reserve account. Unexpected loss, by contrast, has no such hedge, and requires dipping into shareholder capital, disturbing the underpinnings of a regulated financial institution's foundation. This makes it critical for an institution's management to identify unexpected loss as far out in the future as possible.
Today's factors associated with credit risk interrelate with each other more than at any time in memory, and spread far and wide into non-traditional markets. A ripple through the financial markets can set off a non-linear domino effect that builds steady momentum and sends shocks through the financial system. Difficulty also stems from structural changes in the financial system worldwide, including the easing of credit conditions, changes in the regulatory environment, and technological developments. They have combined to catalyze securitization and consolidation and off-balance sheet financing. This obscures credit risk variables, making their isolation, assessment, and measurement challenging.
To strengthen this focus, scenario analysis should become both the starting point and the foundation of stress testing. By starting with scenario analysis, the outcomes become more robust and correlated. For example, a 200-basis point rise in interest rates in an asset-sensitive institution begins a discussion on the effect on marginal credits or on local employers that may struggle or go out of business. In contrast to more traditional statistical risk analyses, you are telling a story - parallel stories, in fact - that unfold over time. What does it take to conduct quality stress tests for a financial institution in order to achieve results that satisfy the regulators, the board of directors, and management? The answer is a big set of good, clean data covering a significant period of time within a stable organization.
This being the case, financial institutions must be wary of proxy data that is purported to reflect the financial institution's portfolio. Proxy data is market or loss data acquired from a third party. It "stands in" for the institution's data when the institution does not have an adequate or sufficient history to reflect its performance through various economic cycles. It may have to be used if a history has not yet been established, but it should be replaced as soon as possible.
Part of what sets stress testing apart from other risk measures is this emphasis and dependency on historical components. This is part of what makes the initial compilation of data so labor intensive - the more historical data that can be compiled, the greater the clarity of the scenarios and resulting outcomes.
Stress testing requires accuracy but not precision. Since it is a predictive activity, it is nearly impossible to be precise. The data source and methodology need to be well defined and defensible because when the wrong path is taken, the ability to review that path, make corrections, and explain why that path was taken to shareholders, regulators, and employees is of paramount importance.
Gain Better Insight Into Credit Risk in a Declining Economy and Real Estate Market
Whether your focus is on your short term risk or the long term outlook of your portfolio, your Allowance for Loan and Lease Losses or how future scenarios could impact your lending, FIS Credit Risk Services can help, with:
- Loan reviews
- Portfolio stress testing
For more information, call us today at 800-822-6758.
On the Radar ... Upcoming Regulatory Deadlines
Keep these dates in mind when planning for training, compliance reviews or exams:
- 10/1/2009 - Effective date for major Regulation Z revisions and HMDA changes for closed-end loans.
- 12/1/2009 - Mandatory compliance date for Regulation GG on unlawful internet gambling.
- 1/1/2010 - Effective date for Regulation DD amendments for overdraft programs.
- 1/1/2010 - Effective date for major revisions to RESPA, including new GFE and HUD-1 settlement forms.
Prepare Your Mortgage Lenders for Registration Under the SAFE Act
By Blair Rugh, Executive Director
On May 28, 2009, the regulatory agencies issued a joint notice of proposed rulemaking for the registration of residential mortgage loan originators employed by regulated financial institutions under the SAFE Act. The SAFE Act, which was enacted on July 30, 2008, requires the registration of all mortgage lenders. The purpose of the SAFE Act is to give mortgage applicants access to information about their loan originator and to keep scurrilous loan originators out of work. The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have developed a registry by state for the registration of mortgage lenders that are not employed by regulated institutions. The federal agencies plan to utilize that system for registering residential mortgage loan originators that work for regulated financial institutions.
For the purposes of the Act, a residential mortgage loan is a consumer purpose loan secured by a dwelling or secured by real estate on which a dwelling will be built. It includes first mortgages, junior mortgages and home equity lines of credit. It includes the initial loan as well as refinancings. It would also cover loans secured by manufactured housing. A loan originator is an individual who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain. Persons who are engaged in underwriting or in a clerical position are generally not within the definition. Also, there is a de minimis level of five loan originations per year.
Any loan originator will be required to register annually on Form MU-4. He or she will have to provide personal information such as their date of birth, place of birth and social security number. They will also have to provide their addresses and employment history for the last ten years, a list of any other business they are engaged in, and information about any serious financial issues, criminal convictions or regulatory actions against them. They will also have to undergo an FBI criminal background check. Each loan originator, when registered, will be assigned a unique identifier by the registry. A financial institution must maintain a list of the registration numbers of its loan originators and provide a loan originator's registration number to any loan applicant that requests it.
Each regulated financial institution will also have to provide information to the registry and will have to formulate a policy and procedures to assure compliance with the regulation. These policies and procedures must have an annual independent audit. For more information on the Nationwide Mortgage Licensing system and to view Form MU-4, go to http://www.stateregulatoryregistry.org/.
