Regulatory Roundup

Open for Comment

Premium Prepayment
A proposal by the Federal Deposit Insurance Corp. that would require all banks to prepay the next three years' worth of premiums. The FDIC said it would receive approximately $45 billion which it could use to deal with rising bank failures. The prepayment would count as a depreciating asset for banks. Under the plan, institutions can apply for a waiver if the prepayment would jeopardize their safety and soundness. Published Oct. 2 in the Federal Register with comments due Oct. 28.

Correspondent Concentration
A proposal by the federal banking regulators that would require institutions to identify their level of exposure to correspondent banks, set prudent correspondent concentration limits and conduct an independent analysis to assess the credit and funding risk of any transaction with another institution before it occurs. Published Sept. 25. Comments due Oct. 26.

Off-Balance-Sheet Assets
A proposal by the banking and thrift regulators that would implement a June ruling by the Financial Accounting Standards Board that financial institutions must bring many off-balance-sheet assets back on to their books. Under the plan, regulators would require banks to immediately hold higher capital when the rule goes into effect next year. Published Sept. 15. Comments due Oct. 15.

Mortgage Disclosures
A proposal by the Federal Reserve Board that would amend Regulation Z to improve disclosures for closed-end mortgages, home equity lines of credit and originator fees. The plan would require a recalculation of annual percentage rates for certain mortgages, prohibit brokers from receiving certain types of payments and require lenders to give borrowers more notice before reducing their home equity line. Published Aug. 26. Comments due Dec. 24.

Recent Actions

Toxic Assets I
The FDIC said Oct. 6 that four investors will receive government financing to acquire a piece of the failed Corus Bank of Chicago.

The investors, led by Starwood Capital Group, will pay $554 million to own 40% of a new entity formed to acquire $4.5 billion of assets, containing mostly construction loans and "real estate owned" belonging to Corus. The FDIC will pitch in the other 60%. The agency will also loan the new entity about $1.39 billion, leaving the venture with $2.77 billion to buy the assets from the Corus receivership, and provide an additional $1 billion line of credit to help fund ongoing construction projects.

Tarp Oversight
Neil Barofsky, the inspector general who oversees the Troubled Asset Relief Program, released a report Oct. 5 that said the Treasury Department gave misleading statements about the health of the initial large banks in which it invested capital.

In a report to Congress, Barofsky claimed that the Treasury labeled all of the initial nine banks to receive Tarp funds as "healthy." Yet, Barofsky said the government had concerns at the time about the health of several of those firms.

Toxic Assets II
The Treasury Department announced three additional investment firms Oct. 5 that have signed up to buy toxic assets through the Public-Private Investment Program.

AllianceBernstein LP, BlackRock Inc. and Wellington Management Co. LLP have each completed closings with at least $500 million of equity. They joined Invesco and TCW Group, which were announced a week earlier. Those five — out of an initial pool of nine chosen firms — bring the total committed equity and debt capital to $12.27 billion. The Treasury said it expects the remaining firms to close their financing by the end of October.

Bank Failures I
State and federal regulators shut three banks on Oct. 2 — the $538 million-asset Warren Bank in Michigan, the $56.3 million-asset Jennings State Bank of Spring Grove, Minn. and the $39.5 million-asset Southern Colorado National Bank in Pueblo — bringing this year's failure total to 98. The three failures' combined cost to the Deposit Insurance Fund is expected to be $293 million.

HMDA Data
Federal regulators released an analysis of 2008 Home Mortgage Disclosure Act data on Sept. 30, which found that although the number of high-priced loans declined overall last year, the share of those loans going to black and Hispanic borrowers rose.

The report said higher-priced lending declined dramatically during the financial crisis as lenders responded to regulatory pressure to rein in such loans. Still, as it has in years past, the data showed that the proportion of black and Hispanic borrowers denied loans rose, while black, Hispanic and Asian borrowers were also less likely to receive conventional loans than white borrowers.

Bank Failures II
Regulators closed the $2 billion-asset Georgian Bank in Atlanta on Sept. 25. Despite Georgian's relatively small size, regulators estimated it would take a heavy toll on the DIF, costing $892 million. The failure came less than a month after the Federal Deposit Insurance Corp. issued a sweeping cease-and-desist order against the bank.

SNC Review
The Shared National Credit review, released Sept. 24 by federal regulators, found that credit losses on loans over $20 million — that are held by three or more financial institutions — hit $53 billion last year.

The biggest portion of problem credits were held by nonbank financial institutions. Though they hold roughly a fifth of the $2.9 trillion in total syndicated credits, they hold nearly half, or $210.2 billion, of all "classified credits." U.S. banking companies hold approximately 40% of syndicated credits, but accounted for just 30% of classified credits (the rest are held by foreign banking companies).

GSE Securities
The Fed's policymaking committee on Sept. 23 said it would continue to buy mortgage-backed securities from Fannie Mae and Freddie Mac through the first quarter of 2010. In its statement, the Federal Open Market Committee said the purchases are intended to "support mortgage lending and housing markets and to improve overall conditions in private credit markets."

Bank Failures III
Regulators shut two subsidiaries of Irwin Financial Corp. of Columbus, Ind., on Sept. 18.

The failures of the $2.7 billion-asset Irwin Union Bank and Trust Co. in Columbus and the $493 million-asset Irwin Union Bank of Louisville, Ken., were estimated to cost the Deposit Insurance Fund a total of $850 million.

Toxic Assets III
The FDIC announced on Sept. 16 the first deal in a government plan to purge toxic assets. Residential Credit Solutions of Fort Worth agreed to pay $64 million to share with the FDIC ownership of $1.3 billion assets from the failed Franklin Bank of Houston.

RCS would own roughly half of the portfolio, with the FDIC owning the other half. The firm and the agency would share control of a new limited liability company, to which the FDIC would lend nearly $730 million to increase the purchasing power.

The deal resembles transactions the FDIC tried to complete to cleanse open banks' balance sheets as part of the administration's broader Public-Private Investment Program. But the FDIC refocused efforts on failed-bank assets after the open-bank program struggled to get off the ground.

Op Sub Exams
The Fed said Sept. 15 that it would start examining potentially hundreds of nonbank subsidiaries of bank holding companies for compliance with the same rules as their parent firms. The Fed said its action stemmed from a pilot project in 2007 to look into nondepository units of banks with significant subprime operations.

Loss-Sharing Agreements
The FDIC on Sept. 11 urged acquirers of failed banks in loss-sharing agreements with the agency to consider six-month forbearance plans for unemployed or underemployed borrowers. Under such a plan, an institution would lower a borrower's monthly payment to a level that "should allow for reasonable living expenses after payment of mortgage-related expenses," the FDIC said.

Bank Failures IV
Regulators shut three banks on Sept. 11, including the $7 billion-asset Corus Bank.

Regulators also closed the $970 million-asset Venture Bank in Lacy, Wash., and the $72 million-asset Brickwell Community Bank in Woodbury, Minn. The three failures were estimated to cost the government just over $2 billion.

Actions Expected Soon

Executive Compensation
The Fed and Office of the Comptroller of the Currency are working on rules to restrict executive pay packages. The Fed is said to be developing guidance that would resemble compensation standards released in April by the Financial Stability Forum, which said compensation practices should take a longer-term view of risk. Fewer details are known about the OCC plan.

Contingent Capital
Regulators are considering forcing large, systemically risky banks to issue "contingent capital," a new type of instrument that lets institutions quickly convert debt to equity under stressful circumstances.

Fed Chairman Ben Bernanke said during a hearing Oct. 8 that regulators are still working on new capital standards, including requiring institutions to hold more capital, maintain a greater share of capital in common equity and issue contingent capital "that converts to common equity when necessary to mitigate systemic risk."

Short-Sale Guidance
The Treasury plans to announce financial incentives for servicers soon to pursue short sales and deeds in lieu of foreclosure for troubled homeowners who do not qualify for the Obama administration's loan modification program.

Overdraft Fees
The Fed is considering whether to require banks to get customers' permission before charging overdraft fees. In a 2008 proposal, the Fed said it was considering whether overdraft protection should be an opt-in or opt-out feature.

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