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OVERVIEW. Financial Regulatory ReformTreasury Capital Purchase Program (CPP)Credit Card Accountability Responsibility and Disclosure Act of 2009Overdrafts. Financial Regulatory Reform. A September to Remember 2008. Sep 7Fannie Mae
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1. ABA Regulatory and Legislative Outlook Kathleen P. McTighe
Senior Counsel, Office of Regulatory Policy
American Bankers Association
2. OVERVIEW Financial Regulatory Reform
Treasury Capital Purchase Program (CPP)
Credit Card Accountability Responsibility and Disclosure Act of 2009
Overdrafts
3. Financial Regulatory Reform
4. A September to Remember … 2008 Sep 7 Fannie Mae & Freddie Mac Placed into conservatorship
Sep 15 Merrill Lynch sold to Bank of America
Sep 15 Lehman Brothers files for bankruptcy
Sep 16 Federal Reserve lends $85B to AIG; takes 79.9% ownership
Sep 19 Treasury announces TARP Proposal
Sep 19 Government creates ABCP MMMF liquidity facility
Sep 19 Treasury announces Money Market Guarantee Program
Sep 21 Goldman Sachs announces it will become BHC
Sep 21 Morgan Stanley announces it will become BHC
Sep 25 WaMu placed into receivership; deposits sold to JPMC
Sep 29 Fed announces $850 billion in liquidity actions
Sep 29 FDIC approves sale of Wachovia to CitiGroup (although it is sold to Wells Fargo on Oct 3 without assistance)
5. Which Led to More Actions … TARP, Legacy Loans Program, Legacy Security Program, Public-Private Partnership Program, Capital Assistance Program, Capital Purchase Program, Extension of CPP, Withdrawals from CPP, Temporary Liquidity Guarantee Program, Hope Now Alliance, Homeowners Affordability Stability Plan, Hope For Homeowners, mortgage backed security insurance, tax incentives for homebuyers, Federal Reserve Board purchase of mortgage backed securities, Automotive Industry Financing Program, Fannie Mae/Freddie Mac Modification Program, national bank shelf charter, relaxation of private equity investment, Money Market Mutual Fund insurance, Term Asset-Backed Securities Loan Facility, Money Market Investor Funding Facility, Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, Commercial Paper Funding Facility, Asset Backed Commercial Paper Money Market Fund Liquidity Facility, Money Market Investing Funding Facility, Term Asset-Backed Securities Loan Facility, GSE loan limit increase, Federal Housing Administration loan limit increase, FHA rescue for troubled borrowers, goodwill net-of-tax change in capital rules, lower risk weights for Fannie and Freddie preferred stock, FDIC Private-Public Partnership, conversion of preferred stock into common of Citi, Systemically Systemic Failing Institutions Program, Targeted Investment Program, executive compensation restrictions, Federal Reserve Board Securities Lending facility, Term Securities Lending Option Program, payment of interest on reserves, “excess balance accounts,” Treasury Public-Private Investment Fund, OTS source of strength agreements, covered bonds, FDIC guarantee of insured debt, unlimited insurance for non-interest bearing accounts, insurance up to $250 thousand for interest-bearing accounts, Fed interest rate cuts to zero, changes in brokered deposit rules, special FDIC insurance assessments, increases in Fannie/Freddie conforming loan, extension of Transaction Account Guaranty ….
6. Which Led to a Need to “Fix” What the Administration Plan tries to fix
Systemic Risk Oversight
Supervision of Systemically Significant Institutions
Resolution of Systemically Significant Institutions
Consumer Financial Protection
Agency Consolidation
Charter Consolidation
Plus much more (regulation of derivatives; ratings agency reform; compensation reform; insurance reform, etc.)
7. Systemic Risk Oversight Objective: Look for risks – particularly correlated risks – that threaten the economy
Means: Form an Oversight Council
Chaired by Treasury, but with all banking and securities agency heads as members
Have permanent staff
Three primary functions:
Monitor for risks within and across industry lines
Advise primary regulator of problems
Report to Congress
8. Systemic Risk Oversight (continued) Alternatives:
Federal Reserve as Systemic Risk Overseer (but does monetary policy + systemic risk role = conflict?)
OCC
New agency
ABA view:
We support the Oversight Council idea
Proposed role is appropriate
9. Supervision of Systemically Significant Institutions (SSIs) Objective: Improve supervision of largest firms
Means:
Designate “Tier 1 Financial Holding Companies (FHCs)”
Give Federal Reserve jurisdiction over all Tier 1 FHCs and (indirectly) over all their subsidiaries
Impose more onerous capital, liquidity, and enterprise risk management requirements
Require all to conform to Bank Holding Company Act activity limits
10. Supervision of SSI (continued) Alternatives:
Refine “supervision by risk” without labels
Impose mandatory size limits or otherwise incent shrinking
Avoid giving Federal Reserve jurisdiction over all subs
ABA view:
Not clear we need “Tier 1” designation
Products that pose systemic risk should be more transparent
Impose comparable restrictions on comparable activities
11. Resolution of SSIs Objective: Eliminate “Too Big to Fail”
Means: Create process for orderly unwinding of any financial firm
Treasury, Federal Reserve, or SEC could initiate, but Treasury would make final decision to resolve
Test: Would failure have serious adverse effects on economy?
FDIC or SEC would be appointed receiver or conservator
Funding?
12. Resolution of SSIs (continued) Alternatives:
Amend Bankruptcy Code, as needed
Increase Deposit Insurance Fund (or draw on credit line) to resolve banks
ABA view:
Replace “Too Big To Fail” with “TBTFQ”
Do not compromise FDIC brand
Do not ask banks to pay for non-bank resolutions
13. Consumer Financial Protection Objective: Protect consumers better
Means:
Create Consumer Financial Protection Agency (CFPA)
Give it rulemaking, supervisory, and enforcement authority over all providers of financial products (except securities and insurance)
Have it design “plain vanilla” products
Have it bless disclosures
Broad jurisdiction over products and services
Eliminate preemption
Expand states’ enforcement authority over banks
14. Consumer Financial Protection (continued) Alternatives:
Limit jurisdiction to non-banks
Beef up consumer protection role in existing regulatory agencies
ABA view:
Do not separate consumer protection from safety & soundness
Preserve preemption over state laws
Close the regulatory gaps
Mortgage and credit card issues have already largely been addressed
15. Agency Consolidation Objectives:
Simplify complicated system
Address perceived supervisory weaknesses
Prevent forum shopping
Means: Eliminate the Office of Thrift Supervision (OTS)
16. Agency Consolidation (Continued) Alternative:
Preserve current regulatory structure
Consolidate all regulatory agencies into one
ABA view:
Preserve the current options
Eliminating the OTS creates perception, but not reality of solution
Current checks and balances are healthy
Forum shopping not a significant problem
17. Charter Consolidation Objectives:
Prevent charter shopping
Close nonbank loopholes
Means:
Eliminate national bank and thrift charters
Have one federal bank charter
Apply BHCA to every company that controls a bank (closing exemption for Industrial Loan Companies, Unitary Thrift Holding Companies, etc.)
18. Charter Consolidation (continued) Alternatives:
Preserve status quo
Eliminate dual banking system
ABA view:
Preserve charter choice, both in terms of regulator and corporate form
Preserve dual banking system
Keep banking and commerce separate
19. So what will happen? Stay tuned …
20. Treasury Capital Purchase Program (CPP)
21. What CPP is…and What It Is Not
22. Legislative Authority Emergency Economic Stabilization Act of 2008 (EESA)
Enacted on October 3, 2008
The Troubled Assets Relief Program (TARP) was established by Treasury under EESA
Goal: Stabilize the U.S. financial system and prevent a systemic collapse
23. Programs Implemented by Treasury under TARP 1. Capital Assistance Program
2. Consumer and Business Lending Initiative
3. Making Home Affordable Program
4. Public-Private Investment Program
5. Capital Purchase Program
6. Asset Guarantee Program
7. Targeted Investment Program
8. Automotive Industry Financing Program
24. A Changing Landscape Countrywide purchased (January 11, 2008)
Bear Stearns decline (March 16)
IndyMac failed (July 11)
Fannie Mae and Freddie Mac assisted (September 7)
Lehman Brothers failed (September 14)
AIG assisted (September 16) (SSFI: 11/25/08 & 4/17/09)
Merrill Lynch purchased (September 15)
Washington Mutual failed (September 25)
Wachovia purchased (October 3)
National City purchased (October 24)
Citigroup assisted (Nov. 23) (TIP: 12/31/08)(AGP:1/16/09)
Bank of America assisted (January 16, 2009)
25. Evolving New Policies & Practices Use of CPP funds
Restrictions on executive compensation
Stress tests and regulatory review of capital levels
Exit strategy
26. Use of CPP Funds Restrictions on the use of CPP funds
No absolute restrictions other than those in the term sheets, although there has been much discussion on use of CPP funds
Periodic reporting of use of CPP funds
Large banks and banks that received funds by early 2009
All banks?
Over 80% of participants used funds to directly support lending
27. Key Executive Compensation Restrictions Restrictions apply as long as a bank holds CPP funds
Treasury Interim Final Rule – effective 6/15/2009
Current restrictions – CPP participants must:
Certify contracts do not encourage or reward unnecessary & excessive risk taking
Recover bonus or incentive compensation paid to “most highly compensated” employees based on material inaccuracies of statement of earnings or gains
Not make golden parachute-type severance for “most highly compensated” employees
Restrict cash bonuses for highly compensated executives (scaled basis)
Provide shareholders non-binding vote on executive compensation
28. Exit Strategy First Option:
Original payback strategy established by CPP term sheets and Agreements pursuant to EESA
Process: “Qualified equity offering”
25% minimum repayment
Second Option:
CPP participant may use Capital Assistance Program (CAP) funds to repay Treasury’s CPP investment
Generally done in conjunction with a request for additional funds under CAP
29. Exit Strategy (Continued) Third Option:
American Recovery and Reinvestment Act of 2009 (ARRA) – section 7001 applies:
Treasury consultation with appropriate Federal banking regulator
Treasury Secretary shall permit TARP recipient to repay, without regard to whether the financial institution replaced funds from any other source or to any waiting period
When CPP funds are repaid, the Secretary shall liquidate associated warrants at current market price
Secretary shall promulgate implementing regulations (no regulations promulgated)
30. Financial Services Structural Revisions Changed structure of former investment banks and insurance companies to commercial banks in order to participate in CPP and other TARP programs
Resulting re-structuring of business models and permissible activities
Impact on the outlook of the “Too-big-to-fail” theory
Increased regulatory review – capital levels and safety and soundness
De-leveraging of some financial institutions
Potential of increased capital
Acquisitions
31. CPP August 2009 Statistics Recent activity has slowed – few new participants and few repayments
$134 billion invested in 637 banks (8.7% of industry participated)
Over 65% are community banks (assets < $1 b)
Over $70 billion CPP funds repaid to the Treasury by 37 banks
Average annualized return to Treasury of 16% for 22 banks that have exited CPP
$5.25 billion dividend payments to Treasury
32. Credit Card Accountability Responsibility and Disclosure Act of 2009Credit CARD Act of 2009
33. Effective Dates Enacted May 22, 2009
Effective date: generally 9 months after enactment (February 2010)
Effective 90 days after enactment (August 20, 2009) for:
Advance notice of rate increase or significant change of terms of cardholder agreement
Length of billing period
Effective 15 months after enactment (August 2010) for:
Interest rate reduction
Reasonable penalty fees
Gift cards
34. Effective August 20, 2009 Advance Notice of Rate Increase. Creditors must provide a 45-day clear and conspicuous advance written notice of:
Credit card rate increase, unless exception applies (time expiration, variable rate, workout arrangement)
“Significant change” to cardholder agreement with right to cancel and pay off over time under permissible repayment method
Federal Reserve to determine “significant change”
Notice must include right to cancel
Length of Billing Period. Creditors must adopt reasonable procedures to ensure that periodic statements are mailed or delivered to consumer no later than 21 days before the due date.
35. Effective February, 2010 Rate Increase Restrictions.
Rates may not increase on outstanding balances unless:
Upon expiration of a specified time period, only if prior to the commencement of the time period, the issuer disclosed the length of the period and rate to apply after the expiration of the period
Variable rates, if rate is based on index not under issuer’s control
Work-out agreements
60-day delinquency of minimum payment
“Outstanding balance” is the amount owed on the 14th day after the date the 45-day advance notice is sent
No rate increases for first year account opened
No rate increases for introductory and promotional rates for 6 months, subject to exceptions Board may determine
36. Effective February, 2010 Repayment Restrictions.
Repayment of outstanding balance terms may not change, except using one of the following upon cancellation of account:
5-year amortization (beginning on effective date of the increase in the 45-day advance notice)
Required minimum not more than doubled
Repayment method no less beneficial
37. Effective February, 2010Limits on fees and interest charges Prohibits fees for on-time payments.
Prohibits double-cycle billing
Over-the-limit (OTL) fees.
Card issuers may not charge OTL fees unless the customer opts-in to permit the issuer to complete the transaction
Periodic statements with such fees must provide notice of right to rescind opt-in
One OTL fee per billing cycle
Regulations forthcoming to prevent manipulation of credit limits designed to increase OTL fees or other penalty fees
Issuers not prohibited from completing OTL transaction as long as there is no OTL fee charged
OTL fee only once during each of 2 subsequent billing cycles, unless consumer has: (1) additional transactions, or (2) the outstanding balance is below the credit limit as of the end of the billing cycle
38. Effective February, 2010Fee Limits on Methods of Payment Issuers may not impose a fee for any method of consumer payment, regardless of method (e.g. mail, electronic transfer, phone)
However, fees are permitted for expedited payment service “by a service representative of the issuer”
39. Effective February, 2010Application of Card Payments Payments in excess of minimum payment amount must be applied first to the card balance with the highest interest rate (high to low)
For deferred interest plans, entire amount in excess of minimum payment must be applied during the last two billing cycles immediately preceding the expiration date of deferred interest period
40. Effective February, 2010 Application of Card Payments 5 pm cut-off: No finance charge may be imposed if the issuer received payment in an “identifiable” form by 5 pm on the due date.
Changes to payment receipt location: No late fee or finance charge may be charged for a late payment if, within 60 days, the issuer made a “material change” in the mailing address for payment, and such change causes a material delay in crediting the account
41. Effective February, 2010Periodic Statements Due date must be same day each month
When payment date is a weekend or holiday, issuer may not treat payment received on the following business day as a late payment
Billing statements must be sent 21 days prior to due date
42. Effective February, 2010Enhanced Consumer Disclosures Minimum Payment Disclosures. Issuer must disclose:
Prescribed minimum payment warning by the Federal Reserve – amount of interest & time to repay
Consumer specific notice on the number of months to repay balance, and total cost, if only minimum payment made and no further advances
Monthly payment amount to repay balance over 36 months, and total cost if repaid over 36 months
Telephone number for credit counseling and debt management
Notice must be conspicuous and in a prominent location, in table with headings, on billing statement
Federal Reserve will prescribe the disclosure form
43. Effective February, 2010Enhanced Consumer Disclosures Due Date, Late Payment Disclosures.
To charge a late fee, the issuer must conspicuously disclose on the periodic statement, the due date and amount of late fee together
To impose a penalty rate increase for a late payment, this fact and the applicable penalty rate, must be conspicuously disclosed on the periodic statement, close to the due date
If payment in person is permitted, issuer must disclose the date the payment at branch or office would be considered made for determining if a late fee can be imposed
44. Effective February, 2010Renewal Disclosures If any term changed since the date of the last account renewal without prior disclosure of the change of term, the issuer must disclose the following, at least 30 days prior to the renewal of the consumer’s account:
Date the account will expire if not renewed
Information about APR, annual fee, interest-free period, calculation method
Method to terminate continued credit availability
45. Effective February, 2010 Internet Posting of Agreements Issuers must post on a website the agreement between the issuer and consumer for each open-end consumer credit plan
Issuer must provide Federal Reserve every agreement it posts on its website
Federal Reserve to establish a website as a central repository for all consumer credit card agreements received from issuers
Exempts workouts of negotiated plans
Exceptions when administrative burden outweighs benefit of transparency
46. Effective February, 2010Issuer Restrictions for Young Consumers To issue a credit card to a consumer under 21:
Written application is required
Application must include:
Signature of an eligible co-signer who will be jointly liable, or
Information showing consumer’s “independent means” to repay
Consumer must opt-in to prescreened offers
Prohibition against credit limit increases without a co-signer approving the increase in writing and assuming joint liability for increase
47. Effective February, 2010Campus Marketing Provisions Universities must disclose marketing contracts made with card issuers to market credit cards
Issuer inducements to students to open card account by offering “tangible items” are prohibited on or near campus
Card issuers must submit annual report to Federal Reserve about terms and conditions of college affinity card agreements
48. Effective August 2010 Interest rate reduction after rate increase.
If issuer increases credit card rate based on certain factors, it must consider changes in such factors when later considering rate reduction. Issuer must:
Have “reasonable methodologies” for assessing factors
Review account increases since Jan. 1, 2009, every 6 months to assess factor changes
Reduce increased rate where indicated
Provide 45 day advance notice of reason for any increase
Act does not require a reduction in any specific amount
49. Effective August 2010 Reasonable penalty fees.
Prohibits issuer imposing a penalty fee or charge for any omission or violation of cardholder agreement unless fee is “reasonable and proportional” to the omission or violation
Fees include: late fees, over-the-limit (OTL), & others
Federal Reserve to establish standards for assessing whether OTL is reasonable and appropriate, including costs, deterrence of omission or violation, or other factors deemed necessary or appropriate
Standards may vary for types of fees and charges
May provide amount of penalty fee or charge presumed “reasonable and proportional”
50. Effective August 2010 Gift Cards. (general-use prepaid cards, stored value cards, gift certificates)
Prohibits dormancy fee, inactivity fee, or service fee, unless:
No activity for prior 12 months
Required disclosures provided prior to purchase (fee may be charged, amount, frequency, inactivity fee may be charged)
Only 1 fee per month
Additional Board requirements met
Some exclusions (i.e. promotional cards)
Prohibits gift card expiration dates, unless:
Not earlier than 5 years after issued or reloaded
Expiration terms clearly and conspicuously stated
Board to issue regulations
51. Impact of CREDIT Card Act Institutions will have to redesign credit card models
Competition will drive market
52. Overdrafts
53. Overdrafts June 2008: FR Board proposal under UDAP & Regulation DD:
Opt out of having overdrafts paid
Opt out of ATM/debit card overdrafts, but not ACH and check ODs
New disclosures on periodic statements
December 2008: FR Board re-proposes under Regulation E
Alternative proposals
Opt in or opt out of having overdrafts paid
Option to have certain debit card ODs declined but have checks, ACH, and “recurring” transactions paid
Requirements related to ATM/debit card overdrafts and holds
Final Regulation DD disclosures: must disclose OD fees on periodic statements, regardless of promotion of ODs
54. Overdrafts Legislative proposal
Opt in
APR calculation
Limits on number and amount of overdraft fees
Legislative status
Monitoring regulatory action
55. Overdrafts - ABA August 2009 Survey: More Consumers Avoid Overdraft Fees 82% of bank customers did not pay an overdraft fee in the previous 12 months
Of the 17% of consumers who paid overdraft fees in prior 12 months, 36% paid just one fee
56. Overdrafts – ABA Consumer Tips to Avoid Paying Overdraft Fees Use direct deposit for paycheck
Track your balance and transactions (online, by phone, at the ATM, 24 hours a day)
Keep a cushion of money in checking account
Link your checking account to a savings account or credit card
Ask your bank for an overdraft line of credit
Ask your bank if they will allow you to “opt-out” of overdraft protection
See if your bank offers automatic notification when your balance drops below a certain level