Regulatory Compliance
The Fed’s Comprehensive Capital Analysis and Review (CCAR) and Capital Plan Review (CapPR) stress scenarios depict a severe recession that, although unlikely, the largest U.S. banks must now account for in their capital planning process. The bank holding companies’ ability to maintain adequate capital reserves, while managing the risk levels of growing portfolios are key to staying within the stress test parameters and meeting liquidity requirements. While each banks’ portfolios will perform differently, as a whole, the delinquency performance of major products such as Auto, Bankcard and Mortgage continues to perform well. Here is a comparison between the latest quarter results and two years ago from the Experian – Oliver Wyman Market Intelligence Reports. Although not a clear indication of how well a bank will perform against the hypothetical scenario of the stress tests, measures such as Probability of Default, Loss Given Default and Exposure at Default to indicate a bank’s risk may be dramatically improved from just a few years ago given recent delinquency trends in core portfolios. Recently we released a white paper that provides an introduction to Basel III regulation and discusses some of its impact on banks and the banking system. We also present a real business case showing how organizations turn these regulatory challenges into buisness opportunities by optimizing their credit strategies. Download the paper - Creating value in challenging times: An innovative approach to Basel III compliance.
By: Shannon Lois These are challenging times for large financial institutions. Still feeling the impact from the financial crisis of 2007, the banking industry must endure increased oversight, declining margins, and fierce competition—all in a lackluster economy. Financial institutions are especially subject to closer regulatory scrutiny. As part of this stepped-up oversight, the Federal Reserve Board (FRB) conducts annual assessments, including “stress tests”, of the capital planning processes and capital adequacy of BHCs to ensure that these institutions can continue operations in the event of economic distress. The Fed expects banks to have credible plans, which are evaluated across a range of criteria, showing that they have adequate capital to continue to lend, even under adverse economic conditions. Minimum capital standards are governed by both the FRB and under Basel III. The International Basel Committee established the Basel accords to provide revised safeguards following the financial crisis, as an effort to ensure that banks met capital requirements and were not overly leveraged. Using input data provided by the BHCs themselves, FRB analysts have developed stress scenario methodology for banks to follow. These models generate loss estimates and post-stress capital ratios. The CCAR includes a somewhat unnerving hypothetical scenario that depicts a severe recession in the U.S. economy with an unemployment rate of 13%, a 50% drop in equity prices, and 21% decline in housing market. Stress testing is intended to measure how well a bank could endure this gloomy picture. Between meeting the compliance requirements of both BASEL III and the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), financial institutions commit sizeable time and resources to administrative tasks that offer few easily quantifiable returns. Nevertheless—in addition to ensuring they don’t suddenly discover themselves in a trillion-dollar hole—these audit responsibilities do offer some other benefits and considerations.
The CFPB, the FTC and other regulatory authorities have been building up their presence in debt collections. Are you in the line of fire, or are you already prepared to effectively manage your riskiest accounts? This year’s collections headlines show an increased need to manage account risk. Consumers have been filing suits for improper collections under the Fair Debt Collection Practices Act (FDCPA), the Servicemembers Civil Relief Act (SCRA), and the Telephone Consumer Protection Act (TCPA), to name a few. Agencies have already paid millions in fines due to increased agency scrutiny. One collections mistake could cost thousands or even millions to your business—a cost any collector would hate to face. So, what can you do about better managing your regulatory risk? 1. First of all, it is always important to understand and follow the collection regulations associated with your accounts. 2. Secondly, follow the headlines and pay close attention to your regulatory authorities. 3. Lastly, leverage data filtering tools to identify accounts in a protected status. The best solution to help you is a streamlined tool that includes filters to identify multiple types of regulatory risk in one place. At minimum, you should be able to identify the following types of risk associated with your accounts: Bankruptcy status and details Deceased indicator and dates Military indicator Cell phone type indicator Fraud indicators Litigious consumers Why wait? Start identifying and mitigating your risk as early in your collections efforts as possible.
Contributed by: David Daukus As the economy is starting to finally turn around albeit with hiccups and demand for new credit picking up, creditors are loosening their lending criteria to grab market share. However, it is important for lenders to keep lessons from the past to avoid the same mistakes. With multiple government agencies such as the CFPB, OCC, FDIC and NCUA and new regulations, banking compliance is more complex than ever. That said, there are certain foundational elements, which hold true. One such important aspect is keeping a consistent and well-balanced risk management approach. Another key aspect is around concentration risk. This is where a significant amount of risk is focused in certain portfolios across specific regions, risk tiers, etc. (Think back to 2007/2008 where some financial institutions focused on making stated-income mortgages and other riskier loans.) In 2011, the Federal Reserve Board of Governors released a study outlining the key reasons for bank failures. This review focused mainly on 20 bank failures from June 29, 2009 thru June 30, 2011 where more in-depth reporting and analysis had been completed after each failure. According to the Federal Reserve Board of Governors, here are the four key reasons for the failed banks: (1) Management pursuing robust growth objectives and making strategic choices that proved to be poor decisions; (2) Rapid loan portfolio growth exceeding the bank’s risk management capabilities and/or internal controls; (3) Asset concentrations tied to commercial real estate or construction, land, and land development (CLD) loans; (4) Management failing to have sufficient capital to cushion mounting losses. So, what should be done? Besides adherence to new regulations, which have been sprouting up to save us all from another financial catastrophe, diversification of risk maybe the name of the game. The right mix of the following is needed for a successful risk management approach including the following steps: Analyze portfolios and needs Predict high risk accounts Create comprehensive credit policies Decision for risk and retention Refresh scores/attributes and policies So, now is a great time to renew your focus. Source: Federal Reserve Board of Governors: Summary Analysis of Failed Bank Reviews (9/2011)
By: Stacy Schulman Earlier this week the CFPB announced a final rule addressing its role in supervising certain credit reporting agencies, including Experian and others that are large market participants in the industry. To view this original content, Experian and the CFPB - Both Committed to Helping Consumers. During a field hearing in Detroit, CFPB Director Richard Cordray’s spoke about a new regulatory focus on the accuracy of the information received by the credit reporting companies, the role they play in assembling and maintaining that information, and the process available to consumers for correcting errors. We look forward to working with CFPB on these important priorities. To read more about how Experian prioritizes these information essentials for consumers, clients and shareholders, read more on the Experian News blog. Learn more about Experian's view of the Consumer Financial Protection Bureau. ___________________ Original content provided by: Tony Hadley, Senior Vice President of Government Affairs and Public Policy About Tony: Tony Hadley is Senior Vice President of Government Affairs and Public Policy for Experian. He leads the corporation’s legislative, regulatory and policy programs relating to consumer reporting, consumer finance, direct and digital marketing, e-commerce, financial education and data protection. Hadley leads Experian’s legislative and regulatory efforts with a number of trade groups and alliances, including the American Financial Services Association, the Direct Marketing Association, the Consumer Data Industry Association, the U.S. Chamber of Commerce and the Interactive Advertising Bureau. Hadley is Chairman of the National Business Coalition on E-commerce and Privacy.
As a scoring manager, this question has always stumped me because there was never a clear answer. It simply meant less than prime – but how much less? What does the term actually mean? How do you quantify something so subjective? Do you assign it a credit score? Which one? There were definitely more questions than answers. But a new proposed ruling from the FDIC could change all that – at least when it comes to large bank pricing assessments. The proposed ruling does a couple of things to bring clarity to the murky waters of the subprime definition. First, it replaces the term “subprime” with “high-risk consumer loans”. Then they go one better: they quantify high-risk as having a 20% probability of default or higher. Finally, something we can calculate! The arbitrary 3-digit credit score that has been used in the past to define the line between prime and subprime has several flaws. First of all, if a subprime loan is defined as having any particular credit score, it has to be for a specific version of a specific model at a specific time. That’s because the default rates associated to any given score is relative to the model used to calculate it. There are hundreds of custom-build and generic scoring models in use by lenders today – does that single score represent the same level of risk to all of them? Absolutely not. And even if all risk models were calibrated exactly the same, just assigning credit risk a number has no real meaning over time. We all know what scores shift, that consumer credit behavior is not the same today as it was just 6 years ago. In 2006, if a score of X represented a 15% likelihood of default, that same score today could represent 20% or more. It is far better to align a definition of risk with its probability of default to begin with! While it only currently applies to the large bank pricing assessments with the FDIC, this proposed ruling is a great step in the right direction. As this new approach catches on, we may see it start to move into other polices and adopted by various organizations as they assess risk throughout the lending cycle.
The cumulative effect of Basel III is expected to have a substantial impact on capital requirements. The total minimum regulatory capital will increase from 8 percent to 10.5 percent. For institutions that are considered "systematically important," an additional holding requirement may be imposed of up to 3.5 percent. Download our white paper to learn more about how your peers are reacting to Basel III and how Experian can help banks to optimize risk-weighted assets. Source: Creating value in challenging times: An innovative approach to Basel III compliance by Experian's Global Consulting Practice
By: Mike Horrocks This week, several key financial institutions will be submitting their “living wills” to Washington as part of the Dodd-Frank legislation. I have some empathy for how those institutions will feel as they submit these living wills. I don’t think that anyone would say writing a living will is fun. I remember when my wife and I felt compelled to have one in place as we realized that we did not want to have any questions unanswered for our family. For those not familiar with the concept of the living will, I thought I would first look at the more widely known medical description. The Mayo Clinic describes living wills as follows, “Living wills and other advance directives describe your preferences regarding treatment if you're faced with a serious accident or illness. These legal documents speak for you when you're not able to speak for yourself — for instance, if you're in a coma.” Now imagine a bank in a coma. I appreciate the fact that these living wills are taking place, but pulling back my business law books, I seem to recall that one of the benefits of a corporation versus say a sole proprietorship is that the corporation can basically be immortal or even eternal. In fact the Dictionary.com reference calls out that a corporation has “a continuous existence independent of the existences of its members”. So now imagine a bank eternally in a coma. Now, I cannot avoid all of those unexpected risks that will come up in my personal life, like an act of God, that may put me into a coma and invoke my living will, but I can do things voluntarily to make sure that I don’t visit the Emergency Room any time soon. I can exercise, eat right, control my stress and other healthy steps and in fact I meet with a health coach to monitor and track these things. Banks can take those same steps too. They can stay operationally fit, lend right, and monitor the stress in their portfolios. They can have their health plans in place and have a personal trainer to help them stay fit (and maybe even push them to levels of fitness they did not think they could reach). Now imagine a fit, strong bank. So as printers churn, inboxes get filled, and regulators read through thousands of pages of bank living wills, let’s think of the gym coach, or personal trainer that pushed us to improve and think about how we can be healthy and fit and avoid the not so pleasant alternatives of addressing a financial coma.
The Consumer Financial Protection Bureau (CFPB) now has the ability to write and enforce 18 consumer protection laws that guide financial products and services. The new regulator has signaled the following issues as priorities: Clarity on how credit scores affect lender decisions: Beginning July 21, 2011, lenders were required to disclose the credit score that they used in all risk-based pricing notices and adverse action notices Shorter and simpler consumer disclosure forms: One of the first priorities is to make the terms and conditions associated with purchasing a mortgage or applying for a credit card shorter and clearer Enforcing the Fair Debt Collection Practices Act: The CFPB will enforce the Fair Debt Collection Practices Act and review current debt collector practices Learn more about the CFPB
By: Staci Baker Just before the holidays, the Fed released proposed rules, which implement Sections 165 and 166 of the Dodd-Frank Act. According to The American Bankers Association, “The proposals cover such issues as risk-based capital requirements, leverage, resolution planning, concentration limits and the Fed’s plans to regulate large, interconnected financial institutions and nonbanks.” How will these rules affect you? One of the biggest concerns that I have been hearing from institutions is the affect that the proposed rules will have on profitability. Greater liquidity requirements, created by both the Dodd-Frank Act and Basel III Rules, put pressure on banks to re-evaluate which lending segments they will continue to participate in, as well as impact the funds available for lending to consumers. What are you doing to proactively combat this? Within the Dodd-Frank Act is the Durbin Amendment, which regulates the interchange fee an issuer can charge a consumer. As I noted in my prior blog detailing the fee cap associated with the Durbin Amendment, it’s clear that these new regulations in combination with previous rulings will continue to put downward pressures on bank profitability. With all of this to consider, how will banks modify their business models to maintain a healthy bottom line, while keeping customers happy? Over my next few blog posts, I will take a look at the Dodd-Frank Act’s affect on an institution’s profitability and highlight best practices to manage the impact to your organization.
By: Staci Baker Just before the holidays, the Fed released proposed rules, which implement Sections 165 and 166 of the Dodd-Frank Act. According to The American Bankers Association, “The proposals cover such issues as risk-based capital requirements, leverage, resolution planning, concentration limits and the Fed’s plans to regulate large, interconnected financial institutions and nonbanks.” How will these rules affect you? One of the biggest concerns that I have been hearing from institutions is the affect that the proposed rules will have on profitability. Greater liquidity requirements, created by both the Dodd-Frank Act and Basel III Rules, put pressure on banks to re-evaluate which lending segments they will continue to participate in, as well as impact the funds available for lending to consumers. What are you doing to proactively combat this? Within the Dodd-Frank Act is the Durbin Amendment, which regulates the interchange fee merchants are charged. As I noted in my prior blog detailing the fee cap associated with the Durbin Amendment, it’s clear that these new regulations in combination with previous rulings will continue to put downward pressures on bank profitability. With all of this to consider, how will banks modify their business models to maintain a healthy bottom line, while keeping customers happy? Over my next few blog posts, I will take a look at the Dodd-Frank Act’s affect on an institution’s profitability and highlight best practices to manage the impact to your organization.
By: Mike Horrocks Earlier this week, my wife and I were discussing the dinner plans for Thanksgiving. The yams, cranberries, and pumpkin pies were purchased and the secret family recipes were pulled out of the cupboard. Everything was ready…we thought. Then the topic of the turkey was brought up. In the buzz of work, family, kids, etc., both of us had forgotten to get the turkey. We had each thought the other was covering this purchase and had scratched if off our respective lists. Our Thanksgiving dinner was at risk! This made me think of what best practices from our industry could be utilized if I was going to mitigate risks and pull off the perfect dinner. So I pulled the page from the Basel Committee on Banking Supervision that defines operational risk as "the risk of loss resulting from inadequate or failed internal processes, people, systems or external events” and I have some suggestions that I think work for both your Thanksgiving dinner and for your existing loan portfolios. First, let’s cover “inadequate or failed processes”. Clearly our shopping list process failed. But how are your portfolio management processes? Are they clearly documented and can they be implemented throughout the organization? Your processes should be as well communicated and documented as the “Smashed Yam Bake” recipe or you may be at risk. Next, let focus on the “people and systems”. People make mistakes – learn from them, correct them, and try to get the “systems” to make it so there are fewer mistakes. For example, I don’t want the risk of letting the turkey cook too long, so I use a remote meat thermometer. Ok, it is a little geeky; however the turkey has come out perfect every year. What systems do you have in place to make your quarterly reviews of the portfolio more consistent and up to your standards? Lastly, how do I mitigate those “external events”? Odds are I will be able to still get a turkey tonight. If not, I talked to a friend of mine who is a chef and I have the plans for a goose. How flexible are your operations and how accessible are you to the subject matter experts that can get you out of those situations? A solid risk management program takes into account unforeseen events and can make them into opportunities. So as the Horrocks family gathered in Norman Rockwell like fashion this Thanksgiving, a moment of thanks was given to the folks on the Basel committee. Likewise in your next risk review, I hope you can give thanks for the minimized losses and mitigated risks. Otherwise, we will have one thing very much in common…our goose will be cooked.
This is last question in our five-part series on the FFIEC guidance on what it means to Internet banking, what you need to know and how to prepare for the January 2012 deadline. Q: How are organizations responding? Experian estimates that less than half of the institutions impacted by this guidance are prepared for the examinations. Many of the fraud tools in the marketplace, particularly those that are used to authenticate individuals were deployed as point-solutions. Few support the need for a feedback loop to identify vulnerabilities, or the ability to employ a risk-based, “layered” approach that the guidance is seeking. _____________ This is the last of our five-part series but we're happy to answer more questions as we know you need to know how to prepare for the January 2012 deadline.
This is fourth question in our five-part series on the FFIEC guidance and what it means Internet banking. Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. If you missed parts 1-3, there's no time to waste, check them out here: Go to question one: What does “multi-factor” authentication actually mean? Go to question two: Who does this guidance affect? And does it affect each type of credit grantor/ lender differently? Go to question three: What does “layered security” actually mean? Today's Q&A: What will the regulation do to help mitigate fraud risk in the near-term, and long-term? The FFIEC’s guidance will encourage financial institutions to re-examine their processes. The guidance is an important reinforcement of several critical ideas: Fraud losses undermine faith in our financial system by exposing vulnerabilities in the way we exchange goods, services and currencies. It is important that members of the financial services community understand their role in protecting our economy from fraud. Fraud is not the result of a static set of tactics employed by criminals. Fraud tactics evolve constantly and the tools that combat them have to evolve as well. Considering the impact that technology is having on commerce, it is more important than ever to review the processes that we once thought made our businesses “safe.” The architecture and flexibility of fraud prevention “capabilities” is a weapon unto itself. The guidance provides a perspective on why it is important to be able to understand the risk and to respond accordingly. At the end of the day, the guidance is less about a need to take a specific action---and more about the “capability” to recognize when those actions are needed, and how they should be structured so that high-risk actions are met with strong and sophisticated defenses. _____________ Look for part five, the final in our series tomorrow.
This is third question in our five-part series on the FFIEC guidance and what it means Internet banking. If you missed the firstand second question, you can still view - our answer isn't going anywhere. Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. Question: Who does this guidance affect? And does it affect each type of credit grantor/ lender differently? The guidance pertains to all financial institutions in the US that fall under the FFIEC’s influence. While the guidance specifically mentions authenticating in an on-line environment, it’s clear that the overall approach advocated by the FFIEC applies to authentication in any environment. As fraud professionals know, strengthening the defenses in the on-line environment will drive the same fraud tactics to other channels. The best way to apply this guidance is to understand its intent and apply it across call centers and in-person interactions as well. _____________ Look for part four of our five-part series tomorrow. If you have a related question that needs an answer, submit in the comments field below and we'll answer those questions too. Chances are if you are questioning something, others are too - so let's cover it here! Or, if you would prefer to speak with one of our Fraud Business Consultants directly, complete a contact form and we'll follow up promptly.
Learn More Image
