Financial Institutions Executive Briefing

May 23, 2013

The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. 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

FDIC Teleconference Held on Proposed Changes to Accounting for Credit Losses
The Federal Deposit Insurance Corporation (FDIC) held a free teleconference to discuss the Financial Accounting Standards Board’s proposed Accounting Standards Update (ASU), “Financial Instruments – Credit Losses (Subtopic 825-15).” The proposal would change recognition and measurement of credit losses for financial and regulatory reporting purposes. The teleconference was held on May 16, 2013. A transcript of the teleconference will be made available. A PDF version of the slides can be downloaded from the FDIC website.

Informational Videos Released by FDIC
The FDIC announced the release of the first installment of a series of videos intended to provide useful information to bank directors, officers, and employees on areas of supervisory focus and proposed regulatory changes. The first installment of six videos is designed to provide new bank directors with information to prepare them for their fiduciary role. Three of the videos address the roles and responsibilities of a director, and the other three videos provide information about the FDIC's Risk Management and Compliance Examination processes.

A second installment, to be released by June 30, 2013, will be a virtual version of the FDIC's Directors' College Program consisting of six modules covering interest-rate risk, third-party relationships, corporate governance, the Community Reinvestment Act, information technology, and the Bank Secrecy Act. A third installment, to be released by year-end, will provide virtual technical training for bank officers and employees as well as more in-depth coverage of important supervisory topics and management's responsibilities. The training program will include modules on fair lending, appraisals and evaluations, interest-rate risk, troubled debt restructurings, the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance.

White Paper Released on Impact of Commercial Real Estate Concentration Guidance

According to a white paper released on April 3, 2013, by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve System (Fed), banks with concentrations of construction and total commercial real estate (CRE) lending that exceeded supervisory criteria in 2006 interagency guidance failed at higher rates during the financial crisis than banks with lower concentrations. The study found that 23 percent of banks that exceeded both the construction and CRE lending supervisory criteria failed during the economic downturn from 2008 through 2011, compared with 0.5 percent of banks that didn’t exceed either criterion. “Construction lending was a key driver in many failures,” the OCC said in a press release. “An estimated 80 percent of the losses to the Federal Deposit Insurance Corporation insurance fund from 2007 to 2011, can be attributed to banks exceeding the 100 percent construction criterion.”

New Product Risks Addressed in Fed Publication
The first quarter 2013 edition of Community Banking Connections, a Fed publication that focuses on safety and soundness issues affecting community banks, is now available. The cover story focuses on risk factors a community bank should consider when introducing a new product or service. Other articles address effective asset/liability management, an examiner’s thoughts on negative provisions and the allowance for loan and lease losses, and confidential supervisory information disclosure rules.

Final Rule Issued on Nonbank Firm Supervision
The Fed has issued a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council (FSOC) when it considers the potential designation of a nonbank financial company for consolidated supervision by the Fed. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), a nonbank financial company can be designated by the FSOC for supervision by the Fed only if it is "predominantly engaged in financial activities." A company is considered to be predominantly engaged in financial activities if 85 percent or more of the company's revenues or assets are related to activities that are defined as financial in nature under the Bank Holding Company Act. Under the rule, a firm is considered “significant” if it has $50 billion or more in total consolidated assets and the FSOC has designated it for Fed supervision. The final rule became effective on May 6, 2013.

Assessment of Systemically Significant Firms Proposed by Fed

The Fed has issued a proposal to institute an annual assessment of banks with $50 billion or more in total consolidated assets and nonbank financial companies designated by the FSOC for Fed supervision. The proposal, mandated by Dodd-Frank, would clarify how the Fed will choose which firms to assess during each calendar year, identify the amount of each firm’s assessment, and collect the funds. The Fed estimates that for 2012, about 70 firms would be assessed, with the across-the-board assessment totaling $440 million. Comments on the proposal are due June 15, 2013.

From the Consumer Financial Protection Bureau (CFPB)

Consumer Complaint Data Released by CFPB
The CFPB has made public a database of federal consumer financial complaints. The Consumer Complaint Database contains information about more than 90,000 individual complaints about mortgages, student loans, bank accounts and services, other consumer loans, and credit cards. The database, which covers approximately 450 companies, allows the public to see what consumers complained about and why, as well as how and when the company responded. A fact sheet summarizing the information in the database has been posted on the CFPB website.

Small-Entity Compliance Guides Published by CFPB
The CFPB has announced the publication of several small-entity compliance guides. The compliance guides describe rules in a plain language and frequently asked questions (FAQ) format intended to make the information more accessible for a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff. Recently published small-entity compliance guides include:

  • Ability-to-Repay and Qualified Mortgage Rule – This rule generally applies to closed-end consumer credit transactions that are secured by a dwelling for which an application is received on or after Jan. 10, 2014.
  • TILA Escrow Rule – The final Truth in Lending Act (TILA) escrow rule, which takes effect for applications received on or after June 1, 2013, increases to five years the minimum time for which lenders must maintain an escrow account on a “higher-priced” mortgage secured by a first lien. The guide covers some additional exemptions from the rule.
  • Equal Credit Opportunity Act (ECOA) Valuations Rule – This new rule applies to all written valuations (not just appraisals) that are developed in connection with applications for covered transactions. It covers all first liens on dwellings, including closed-end mortgage loans and open-end loans. The ECOA valuations rule is effective for applications received on or after Jan. 18, 2014.
  • 2013 Home Ownership and Equity Protection Act (HOEPA) Rule – All the new requirements in the 2013 HOEPA rule will apply to transactions for which an application is received on or after Jan. 10, 2014.

Clarifications of Mortgage Rules Proposed by CFPB
The CFPB has announced several proposed clarifications to its ability-to-repay and mortgage servicing rules. The proposal addresses five topics:

  • Debt-to-income ratio – Changes are proposed to provide clearer rules for determining debt-to-income ratio.
  • Contract variances and the temporary qualified mortgage (QM) provision – With the changes, loans meeting eligibility requirements provided in a separate agreement between a creditor and government-sponsored enterprises (GSE) or federal agencies could be qualified mortgages.
  • Purchase, guarantee, or insurability status and the temporary QM – The proposal would clarify that the temporary QM provision’s requirement that mortgages be “eligible” for purchase, insurance, or guarantee does not exclude loans that do not satisfy those procedural and technical requirements.
  • No field pre-emption under Regulation X – The preamble to the 2013 mortgage servicing final rules issued in January 2013 made clear that Regulation X does not pre-empt the field of possible mortgage servicing regulation by states, and the CFPB is proposing the addition of a comment to Regulation X to emphasize this.
  • Small servicer exemption – The servicing rules for the Real Estate Settlement Procedures Act and the TILA issued in January 2013 included an exemption from some requirements for institutions with small servicing operations. The proposed changes would clarify which mortgage loans to consider in determining whether a servicer qualifies as “small.”

Comments on the proposal are due June 3, 2013.

From the Financial Accounting Standards Board (FASB)

Revised Proposal on Leases Issued
On May 16, 2013, the FASB and the International Accounting Standards Board (IASB) issued for comment the long-awaited revision of the proposed ASU that, if adopted, would result in major changes to lease accounting. The proposal, “Leases (Topic 842): A Revision of the 2010 Proposed FASB Accounting Standards Update, ‘Leases (Topic 840),’” would change the standards for lease accounting for both lessees and lessors. For lessees, this proposal would almost completely eliminate an entity’s ability to have “off-balance-sheet” leases and instead require most leases to be recognized as an asset and liability on the balance sheet. Similarly for lessors, the rules significantly change the criteria for recognizing lease assets, which may affect the timing and nature of revenues and expenses for lessors.

The FASB has published a “FASB in Focus” article that briefly describes the main provisions proposed in the new exposure draft. Comments on the exposure draft are due Sept. 13, 2013.

Exposure Draft Issued on Accounting for Investments in Low-Income Housing Partnerships
The FASB issued an exposure draft of a proposed ASU, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” on April 17, 2013. The amendments in the proposed ASU would modify the conditions that must be met to allow reporting entities that invest in a qualified affordable housing project through a limited-liability entity to elect to account for the investment using the effective yield method. Investments in qualified affordable housing projects not accounted for using the effective yield method would continue to be accounted for as equity method investments or cost method investments in accordance with FASB Accounting Standards Codification (ASC) 970-323. The decision to apply the effective yield method would continue to be an accounting policy decision rather than a decision to be applied to individual investments that qualify for using the effective yield method.

Comments on the proposal are due June 17, 2013.

Comments Requested on Private-Company Decision-Making Framework
On April 15, 2013, the FASB, along with the Private Company Council (PCC), issued an Invitation to Comment, “Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.” The framework is intended to serve as a guide for the FASB and the PCC for determining whether and in what circumstances to provide alternative recognition, measurement, disclosure, display, effective date, or transition guidance for private companies reporting under U.S. generally accepted accounting principles (GAAP). This new document reflects the views of the FASB and the PCC after they considered feedback received from stakeholders on a FASB-issued July 2012 Discussion Paper on the same topic.

Comments on the proposed guide are due June 21, 2013. A “FASB in Focus” article, a brief summary of the Invitation to Comment, was also published.

Exposure Draft Issued on Disclosures for Nonpublic Employee Benefit Plans
A proposal was issued on April 30, 2013, to defer indefinitely the effective date for certain quantitative disclosure requirements in FASB ASC 820-10-50-2(bbb) for investments held by a nonpublic employee benefit plan in the plan sponsor’s own equity securities. The proposed ASU, “Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04,” is intended to address concerns that certain disclosures required by ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” potentially could provide proprietary information about private companies through the dissemination of their employee benefit plans’ financial statements on the plan regulator’s website.

The proposed deferral would be effective upon issuance of the final ASU, which is expected in June 2013. Comments on the proposal are due to the FASB May 31, 2013.

From the Securities and Exchange Commission (SEC)

New Rules to Prevent Identity Theft Adopted
The SEC and the Commodity Futures Trading Commission announced on April 10, 2013, final rules and guidelines requiring certain entities regulated by the SEC such as broker-dealers, mutual funds, and investment advisers to adopt a written identity-theft program. The rules apply to entities that meet the definition of “financial institution” or “creditor” under the Fair Credit Reporting Act. The identity-theft program must include policies and procedures designed to identify, detect, prevent, and mitigate identity theft. The rules require entities to provide such things as staff training and oversight of service providers. Guidelines and examples of identity-theft red flags are provided to help entities administer their programs. The new rules were published in the Federal Register on April 19, 2013, and became effective May 20, 2013. Compliance is required by Nov. 20, 2013.

The SEC staff has prepared a small-entity compliance guide, “Identity Theft Red Flags Rules: A Small Entity Compliance Guide,” which summarizes and explains rules on identity theft adopted by the SEC. The guide notes that the SEC’s rules are substantially similar to those of the Federal Trade Commission and other agencies. Those rules applied to SEC-regulated entities when they were adopted, so entities subject to the SEC’s rules should already be in compliance with the rules’ requirements. However, the SEC guidance does contain examples and minor language changes designed to help guide entities in complying with the rules.

From the Center for Audit Quality (CAQ)

Highlights of CAQ SEC Regulations Committee Meeting Published
The CAQ SEC Regulations Committee has published highlights from its March 19, 2013, joint meeting with staff of the SEC. The SEC Regulations Committee meets periodically with the SEC staff to discuss emerging technical accounting and reporting issues relating to SEC rules and regulations. Topics discussed at the March meeting include:

  • Pro forma adjustments under Rule 11-02(b)(6) of Regulation S-X
  • Rulemaking under the Jumpstart Our Business Startups Act
  • Recommendations by the SEC Advisory Committee on Small and Emerging Businesses
  • Complying with Rule 3-09 of Regulation S-X when the registrant’s and investee’s fiscal year-ends differ by six months
  • Applying the annual report “grace period” in Rule 3-09 of Regulation S-X in connection with a registration statement
  • Measuring the significance of a recently acquired subsidiary or issuer guarantor under Rule 3-10(g) of Regulation S-X
  • Applying the updating requirements for Rule 3-05 financial statements when Rule 3-06 of Regulation S-X previously has been used to satisfy the audited financial statements requirement in the most recent year



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