Financial Institutions Executive Briefing 8-17-2016

| 8/17/2016


The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.

From the Federal Financial Institution Regulators

Updated Community Bank Corporate Governance Video Released

To help community bank directors and officers create sound frameworks for corporate governance of their institutions, on July 19, 2016, the Federal Deposit Insurance Corp. (FDIC) released an updated video on the topic. The video examines the importance of effective corporate governance and focuses on significant considerations for creating a strong program, including the bank’s risk profile, the appropriate risk appetite, recruitment and retention of qualified managers, strategic planning, and program implementation.

Guidance on Managing Oil and Gas Loan Risks Issued

On July 27, 2016, the FDIC issued guidance focused on principles for the prudent management of risks associated with oil and gas exposures. The FDIC expects banks to monitor their direct and indirect exposures to oil and gas and to manage any related concentration risks.

The guidance, in the form of Financial Institution Letter (FIL) 2016-49, highlights sound underwriting standards and strong risk management and monitoring to address direct lending concentrations. It also calls for consideration of borrowers that have indirect exposures to oil and gas volatility but nevertheless could be affected by economic growth or contraction related to the oil and gas market.

The FDIC also repeated previously issued guidance on constructive and well-conceived workout plans for borrowers affected by adverse conditions in the oil and gas market in order to, wherever possible, strengthen the credits and mitigate losses.

Draft Guidance on Third-Party Lending Issued

The FDIC released, on July 29, 2016, a request for comments on proposed guidance for third-party lending. The guidance would provide detailed expectations about managing and assessing third-party lending arrangements and related risks and defines third-party lending as an “arrangement that relies on a third party to perform a significant aspect of the lending process.” Such arrangements may include insured institutions originating loans for third parties, originating loans through or jointly with third-party lenders, or originating loans using platforms developed by third parties.

The proposed exam guidance would supplement the FDIC’s existing guidance on third-party risk management and covers strategic, operational, credit, and compliance risks associated with third-party lending. The proposed guidance would also cover the basic components of an effective third-party lending risk management program, including risk assessment, due diligence, contract structuring, and oversight.

In addition, the draft guidance includes supervisory considerations for third-party lending arrangements and outlines exam procedures.

On Aug. 4, 2016, the comment period was extended, and comments are now due Oct. 27, 2016.

OCC Comptroller’s Handbook Updated

On July 29, 2016, the Office of the Comptroller of the Currency (OCC) announced the release of revisions to the “Corporate and Risk Governance” booklet of the Comptroller’s Handbook. The updated booklet discusses expectations and responsibilities for bank management and boards with respect to enterprise risk management and governance. Among other changes, the discussion about risk management has been expanded to include:

  • The three lines of defense
  • Guidance on strategic, capital, and operational planning
  • A description of risk culture and appetite for risk in the context of a risk governance framework
With the issuance of these revisions, the OCC also rescinded several of its previously issued booklets.

Voluntary Diversity Self-Assessments Approved

In a July 13, 2016, Federal Register filing, the OCC, Board of Governors of the Federal Reserve System (Fed), FDIC, Consumer Financial Protection Bureau, Securities and Exchange Commission (SEC), and National Credit Union Administration (NCUA) announced that the Office of Management and Budget (OMB) has approved the agencies’ voluntary diversity self-assessment model for financial institutions. The self-assessment is based on diversity and inclusion assessment standards issued by the agencies in the summer of 2015, as first proposed in 2013 under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In a joint news release on Aug. 2, 2016, the Fed, FDIC, and OCC announced that they have provided information about how to begin to submit self-assessments of diversity policies and practices. They also issued a frequently asked questions (FAQ) document about the process. The agencies highlighted that banks are “strongly encouraged to disclose on their websites their diversity policies and practices” as well as to “provide their policies, practices, and self-assessment information to their primary federal financial regulator.”

The first round of self-assessments will cover calendar year 2015. The diversity policy statement focuses primarily on institutions with more than 100 employees; however, smaller banks are encouraged to use the diversity standards as well. The agencies stated that they will not assess banks’ diversity policies and practices or use the self-assessments in their examination process.

Final Updates to Community Reinvestment Act Q&As Issued

In a July 15, 2016, news release, the OCC, Fed, and FDIC announced their publication of revised interagency questions and answers about Community Reinvestment Act compliance. The revised guidance focuses on alternative ways to deliver retail banking services, innovative or flexible lending practices, qualified investments, and community development, as well as responsiveness and innovation aspects of an entity’s loans, investments, and community development services. New illustrations and examples related to community development activities also are provided.

Cybersecurity Discussed at Interagency Committee Meeting

On July 19, 2016, members of the Financial and Banking Information Infrastructure Committee, a group of representatives from 18 federal and state financial regulatory organizations, met in Washington, D.C., for a discussion of cybersecurity policy issues in the financial sector.

The meeting included a briefing from the FBI on the current cyberthreat landscape and a discussion of how to increase information sharing among committee members and develop common risk-based approaches to manage cyberrisk. The committee also reviewed the results of recent cyber exercises coordinated by the committee and the Financial Stability Oversight Council that evaluated the effects of a cyber incident on financial stability. In addition, the SEC chair and the Commodity Futures Trading Commission (CFTC) chair presented their agencies’ approaches to cybersecurity.

Reduction in Credit Union Exam Frequency Announced

On July 21, 2016, the NCUA board unanimously approved its 2017-2021 strategic plan, which includes the elimination of the requirement for all federally insured, state-chartered credit unions with $250 million or more in assets and federal credit unions to have an annual examination.

Effective immediately, federal credit unions will not be required to undergo an exam every calendar year; however, the time between exams may not exceed 23 months. Regional directors will schedule the exams at their discretion for federally insured, state-chartered credit unions with assets greater than $250 million, based on defined factors, including the institution’s risk profile and the amount of time since its last exam.

Brexit Effects on Financial Stability Reported

The Department of the Treasury’s Office of Financial Research (OFR) announced the July 25, 2016, issuance of its midyear summary assessment of threats to U.S financial stability. The OFR reports that threats edged higher but remained in the medium range with the approval of the United Kingdom (U.K.) referendum to exit the European Union (EU), often termed Brexit.

According to the report, “The referendum result was a major shock to U.K. investors and to confidence in the U.K. economy, with global effects. … Although other risky assets largely recovered amid expectations of policies to mitigate fallout from the referendum result, these markets may be underpricing the considerable risks ahead.”

Implications of the Brexit that could affect the U.S. financial system include a potential decline in U.K. or EU trade, direct financial exposures, and global investor confidence. According to the report, “The uncertainty and the ultimate decisions could have major legal and economic implications for the U.K.’s very large financial services industry and for the cross-border financial flows on which the U.K. is highly dependent.”

Consistent with the 2015 year-end report, factors contributing to financial stability risks include rising credit risk, current low interest rates, and the uneven resilience of the U.S. financial system in the aftermath of the 2008-2009 U.S. financial crisis. Interest rate risk continued to be identified as the single most elevated area of risk to U.S. financial stability.

From the Consumer Financial Protection Bureau (CFPB)

Resources for HMDA Filers Published

The CFPB updated its website to include resources for financial institutions required to file Home Mortgage Disclosure Act (HMDA) data. Beginning with data collected in 2017, financial institutions will file with the CFPB rather than the Fed. The resources include filing instruction guides for HMDA data collected in 2017 and 2018, an overview of the web-based data submission platform, and a frequently asked questions document.

Amendments to TRID Rule Proposed

On July 29, 2016, the CFPB announced that it is issuing for public comment certain proposed changes to the federal mortgage disclosure requirements under the Real Estate Settlement Procedures Act and the Truth in Lending Act (TILA-RESPA) Integrated Disclosures (TRID) rule.

Among the items included in the proposal are tolerance provisions for the disclosed total of payments, which would make these disclosures consistent with pre-TRID practices and parallel with the TRID tolerances for disclosures of financial charges. The CFPB’s changes would also add commentary facilitating the customary sharing of disclosures with third parties, such as sellers and real estate brokers, and partially exempt certain housing assistance loans from TRID requirements and extend the rule’s coverage to all cooperative units.

Comments are due Oct. 18, 2016.

From the Financial Crimes Enforcement Network (FinCen)

FAQs on Customer Due Diligence Rule Issued

In an effort to help bankers understand their obligations under the recently issued Customer Due Diligence Requirements for Financial Institutions rule (the customer due diligence rule), FinCen issued an FAQ document on July 19, 2016, aimed at providing greater clarity on the rule’s scope and application.

The rule requires banks to collect information about beneficial owners when an account is opened. A beneficial owner is an individual who owns more than 25 percent of the equity interests in a company or is the single individual who exercises control. Covered institutions have until May 11, 2018, to be compliant with the new rule.

From the Financial Accounting Standards Board (FASB)

Additional Income Tax Disclosures Proposed

The FASB issued for comment a proposed Accounting Standards Update (ASU) on July 26, 2016. The proposed standard, “Income Taxes (Topic 740): Disclosure Framework – Changes to the Disclosure Requirements for Income Taxes,” would require additional income tax disclosures and stems from the board’s disclosure framework project.

Specifically, all entities would be required to disclose a description of any enacted change in tax law that probably would affect the financial statements in a future period. The proposal also would reduce diversity in practice by explicitly requiring disclosure about tax carry-forwards.

Public business entities would be required to disclose separately any reconciling item that is more than 5 percent of the amount computed by multiplying pre-tax income by the statutory income tax rate, and to explain the changes in those reconciling items from year to year. The bright line of 5 percent for reconciling items in the proposal is aligned with Rule 4-08(h) of Regulation S-X, which is applicable to SEC reporting companies.

Comments are due Sept. 30, 2016.

From the Securities and Exchange Commission (SEC)

Progress Statement Issued on U.S. Treasury Market Structure Review

On Aug. 2, 2016, the U.S. Department of the Treasury, Fed, Federal Reserve Bank of New York, SEC, and CFTC released a joint statement about the progress made since July 15, 2015, when a joint staff report about the U.S. Treasury market was issued. That report analyzes the significant volatility experienced in the U.S. Treasury market on Oct. 15, 2014.

The statement describes the information-gathering and risk management actions taken by the agencies in the past year to improve the U.S. Treasury market. Furthermore, the release describes the agencies’ next steps for improving the U.S. Treasury market in light of the risks that became evident on Oct. 15, 2014.

Extension of Accredited Investor Definition Recommended

At a meeting on July 19, 2016, of the Advisory Committee on Small and Emerging Companies, the group recommended that the SEC expand the number of investors eligible to buy unregistered securities. The committee recommended that the SEC extend the definition of “accredited investor” to encompass those with professional accreditations (such as Series 7, Series 65, Series 82, and chartered financial analyst), prior investment experience, and those who pass an accredited investor examination, among other criteria. The current accredited investor definition includes certain income and net worth requirements.

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Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.