Financial Services Report, Spring 2012

Editor's Note

A huge solar storm hit this winter, dumping enough energy in two days to power every residence in New York City for two years. It disrupted GPS service and caused other weird stuff. What else could explain havoc like Madonna's half-time show? Spring may have arrived, but a lot of people are still digging out from under this pile of neutrinos.

It is tempting to blame "severe space weather," but it can't account for all the nuttiness. That's where we come in. We brought our pocket translator.

High on the list of things needing translation is the Consumer Financial Protection Bureau ("CFPB"). It is up and running and has the look of Godzilla about to enter Tokyo. Signs from different sectors report, ominously, that disclosures alone aren't going to placate the creature, and that a number of products or industries are going to get flattened first. No one is evacuating yet, but we have our binoculars trained. (See http://www.mofo.com/resources/regulatory-reform /.) We devote an entire section of this Newsletter to the latest sightings of the Bureau. (See Bureau Report).

Speaking of "larger participants," consider consumer arbitration. Teeth are still rattling from the aftershocks of the Concepcion decision. The Ninth Circuit is now falling into line—not very Ninth-ish—but reports show other pockets of resistance in the usual places like California and now, surprisingly, the Second Circuit. We offer a special section on these developments. (See Arbitration Report.) Also, a lot has happened in Washington (see Beltway Report), on privacy (see Privacy Report), in the world of mortgages (see Mortgage Report), and on preemption (see Preemption Report).

Until next time, remember that April is National Anxiety Month. So, measure twice/cut once, don't buy Lady Gaga's used meat dress at the secondhand store (worn just once!), and donate generously to my SuperPac. (See www.emperorforlife.com.)

Beltway Report

Bend Over, Cough

On January 23, 2012, the Federal Deposit Insurance Corporation ("FDIC") published a notice of proposed rulemaking that would require certain large insured depository institutions to conduct annual capitaladequacy stress tests. The proposal, implementing section 165(i)(2) of the Dodd- Frank Act, would apply to FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets of more than $10 billion. The FDIC regulated 23 state nonmember banks with total assets of more than $10 billion as of Sept. 30, 2011. The stress tests would provide forward-looking information that would assist the FDIC in assessing the capital adequacy of the banks covered by the rule. The banks that would be required to conduct the stress tests also are expected to benefit from improved internal assessments of capital adequacy and overall capital planning.

Get Your Annual Stress Test

The OCC requested public comment on a proposed rule to implement section 165(i)(2) of the Dodd-Frank Act. This proposed rule would require national banks and federal savings associations with total consolidated assets of more than $10 billion to conduct an annual stress test as prescribed by the proposed rule. In addition to the annual stress test requirement, such institutions would be subject to certain reporting and disclosure requirements.

Robocall Rules

On February 15, 2012, the Federal Communications Commission published a long-awaited final rule on the delivery of autodialed and prerecorded telephone calls. The final rule is intended to protect consumers from certain unwanted telemarketing calls and to maximize consistency with the Federal Trade Commission's ("FTC") Telemarketing Sales Rule. For additional information, please review our client alert at: http://www.mofo.com/files/Uploads/Images/120316-FCCAdopts-New-Rules-for-the-Delivery-of-Telemarketing-Calls-to-Cell-Phones.pdf .

CRA Adjusts for Size

On December 22, 2011, the federal banking agencies published their annual Community Reinvestment Act ("CRA") asset-size threshold adjustments for small and intermediate small depository institutions, based upon changes in the average of the Consumer Price Index ("CPI") for Urban Wage Earners and Clerical Workers. For the period ending in November 2011, the CPI increased 3.43%, and effective January 1, 2012, a "small bank" or "small savings association" is one that as of December 31 of either of the prior two calendar years had assets of less than $1.160 billion. An "intermediate small bank" or "intermediate small savings association" had assets of at least $290 million as of December 31 of both of the prior two calendar years, and less than $1.160 billion as of December 31 of either of the prior two calendar years.

FRB's Financial Stability Analysis

The FRB issued an approval order in connection with the proposed acquisition of RBC Bank by The PNC Financial Services Group, and included the first financial stability analysis required by the Dodd-Frank Act. The Act amended Section 3 of the Bank Holding Company Act of 1956 to require FRB to consider "the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the U.S. banking or financial system." In the PNC-RBC transaction, the FRB considered whether the proposal would result in a material increase in risks to financial stability due to the increase in size of the combining entities, a reduction in the availability of substitute providers, the interconnectedness among the combining entities and the rest of the financial system, the extent of crossborder activities of the combining entities, and the degree of difficulty of resolving the combined entities. For each factor, the FRB looked at size, substitutability, interconnectedness, complexity, crossborder activity, and all of the financial stability factors in combination.

Living Wills For The Over 50s

The FDIC approved a final rule requiring insured depository institutions with $50 billion or more in total assets to submit to the FDIC periodic contingency plans concerning their resolution in the event of its failure. These resolution plans will inform the FDIC's ability, as receiver, to resolve the institution in a manner that ensures that depositors receive access to their insured deposits within generally one business day of the institution's failure, maximizes the net-present-value return from the sale or disposition of its assets, and minimizes the amount of any loss to be realized by the institution's creditors. This final rule replaces an interim final rule adopted by the FDIC in September 2011, and complements the separate joint rulemaking by the FRB and the FDIC. Currently, 37 depository institutions are covered by this rule, which becomes effective on April 1, 2012.

Guidance on Junior Lien Loan Loss Allowances

On January 31, 2012, the federal banking agencies and the National Credit Union Administration issued supervisory guidance on allowance for loan and lease losses (ALLL) estimation practices associated with loans and lines of credit secured by junior liens on one- to four-family residential properties. The guidance reiterates policy and reminds regulated financial institutions to monitor all credit-quality indicators relevant to credit portfolios, including junior liens. The agencies reiterate key concepts included in generally accepted accounting principles and existing ALLL supervisory guidance related to the ALLL and loss estimation practices, and reminded institutions to follow appropriate risk-management principles in managing junior lien loans and lines of credit.

Bureau Report

Is CFPB Too Big to Fail?

The CFPB released its budget for FY 2012 and FY 2013. The plan calls for 942 full time equivalent employees ("FTEs") in FY 2012 (ending Sept 30, 2012), and 1,359 FTEs in FY 2013. Total expenditures would be about $356 million in FY 2012 and $448 million in FY 2013. This compares to a $300 million FY 2013 budget request from the FTC and more than $2 billion from the SEC – just to give a sense of the differing scale of federal agencies.

What Have You Done For Me Lately?

The Dodd-Frank Act requires the CFPB to report to Congress twice each year about its activities. The first such report was filed at the end of January. The Report reiterates that the CFPB's primary focus is mortgages, mortgage servicing, credit cards and student loans, but it also mentions payday lending, deposit accounts and prepaid cards. The Report includes a list of the CFPB's regulatory priorities. See http:// www.consumerfinance.gov/wp-content/uploads/2012/01/Congressional_Report_Jan2012.pdf .

Highlights:

The CFPB "has begun assessing the policies and practices of certain mortgage servicing companies, including their default servicing practices like loan modification and foreclosure." The CFPB has hired 757 employees, and fewer than a third transferred from federal banking regulators and other agencies. The Report describes the CFPB's complaint handling process (pages 16- 20), and recaps various reports, rules, policies and financial highlights. March Madness

How can you be sure that sensitive materials you turn over to the Bureau won't wind up on Wikileaks? Or in the hands of class action lawyers?

On March 15, 2012, the CFPB requested comment on a proposed rule that would establish protections for privileged information submitted to the CFPB by the financial institutions it supervises. The proposed rule would provide that the submission of information by a supervised entity to the CFPB would not waive any applicable privilege that the institution could claim with respect to that information (including if the CFPB ultimately provided such information to a federal or state agency). The proposal also would allow the disclosure of privileged documents from the CFPB to "any state...