Financial Institutions Executive Briefing
Sept. 27, 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
Annual Assessment on Systemically Significant Firms Issued
The Federal Reserve System (Fed) issued on Aug. 16, 2013, a final rule instituting an annual assessment on banks and savings and loans with $50 billion or more in total consolidated assets. Nonbank financial companies designated by the Financial Stability Oversight Council for Federal Reserve supervision are also affected by the final rule. The provisions of Section 318 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) require the Fed to collect assessments from systemically significant firms that are equal to the estimated total expenses necessary to carry out the Fed’s supervisory and regulatory responsibilities with respect to those firms.
The Fed will notify each firm of the amount due for its initial 2012 assessment period in October 2013, and that amount will be due Dec. 15, 2013. In its news release announcing the issuance of the new rule, the Fed estimated it will collect about $440 million from 70 companies for the 2012 assessment period.
Fed Paper Released on Capital Planning at Large Bank Holding Companies
In a paper released Aug. 19, 2013, the Fed reported that large bank holding companies (BHCs) have improved their capital planning processes in recent years. BHCs have more work to do, however, to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions. The paper, “Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice,” contains a discussion of the Fed’s expectations for internal capital planning and a description of the practices it has observed during recent comprehensive capital analysis and review (CCAR) exercises. CCAR is the Fed’s supervisory program for assessing the capital plans.
The Fed found that BHCs need to improve multiple aspects of their capital planning processes, including their accounting for risks most relevant to the specific business activities, methods of projecting the effect of certain stresses on their capital needs, and governance of the capital planning processes. The Fed’s capital plan rule requires all U.S.-domiciled BHCs with total consolidated assets of $50 billion or more to develop and maintain a capital plan supported by a robust process for assessing their capital adequacy.
Revised Capital Reporting Forms Proposed by FFIEC
On Aug. 12, 2013, the Federal Financial Institutions Examination Council (FFIEC) published in the Federal Register proposed revisions to the regulatory capital reporting forms. The proposed revisions to the call report (FFIEC 031 and 041) and the risk-based capital reporting for institutions subject to the advanced capital adequacy framework (FFIEC 101) are consistent with the revised regulatory capital (Basel III) rules approved in July 2013.
Comments on the proposal are due Oct. 11, 2013.
Video on Interest-Rate Risk Released by FDIC
On Aug. 6, 2013, the Federal Deposit Insurance Corp. (FDIC) announced the release of a new technical assistance video addressing the main elements of a bank’s interest-rate risk framework. The new video is the latest in a series of presentations designed for community bank management and individuals involved in the interest-rate risk management function. It provides a general overview of the interest-rate risk management process and recent industry trends. Over the next five months, additional FDIC-released videos will cover fair lending, appraisals and evaluations, troubled debt restructurings and the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance coverage.
The complete list of available technical assistance videos can be found on the FDIC website.
From the Consumer Financial Protection Bureau (CFPB)
Updated Examination Procedures for Mortgage Regulations Released
The CFPB on Aug. 15, 2013, released an update to its interim examination procedures in connection with the new mortgage regulations issued in January 2013. The examination procedures manuals for the Real Estate Settlement Procedures Act and the Truth in Lending Act were updated. Many of the new mortgage regulations become effective in January 2014. The interim examination procedures offer valuable guidance to financial institutions and mortgage companies on what the CFPB will be looking for as the rules take effect.
The new updates cover ability-to-repay (ATR)/qualified mortgages (QMs), high-cost mortgages, and appraisals for higher-priced mortgage loans as well as recent changes to the escrows rule and credit card rules. This new guidance follows a June 2013 release of examination procedures for appraisals, escrow accounts, and compensation and qualifications for loan originators.
Small-Entity Compliance Guide for ATR/QM Rule Revised
On Aug. 14, 2013, the CFPB published an updated small-entity compliance guide, “Ability-to-Repay and Qualified Mortgage Rule.” The updated guide reflects recent changes made to the final rules that become effective Jan. 10, 2014. The revisions in the updated guide cover exemptions to ATR regulations for certain creditors, loans, and federal programs. They reflect modifications to the points and fees calculation in the loan originator rule and the annual percentage-rate threshold for small-creditor and balloon-payment QMs. The revisions also clarify what counts as a QM for loans made and held by small creditors, which creditors are eligible to issue balloon payment QMs, how to determine if QMs are eligible for purchase or guarantee by a government-sponsored enterprise, and how to determine debt and income under a QM’s debt-to-income limit.
Remittance Rule Compliance Guide Updated
The CFPB issued an update to the small-entity compliance guide “International Fund Transfers” on Aug. 8, 2013. The revisions made in the update reflect changes made to the remittance transfer rule that delay the rule’s effective date, reduce institutions’ liability for senders’ errors, and clarify what sending institutions must disclose about fees charged by the recipient’s bank.
The CFPB also made a technical correction to the final rule, which now takes effect Oct. 28, 2013, and released a video overview to accompany the compliance guide.
From the Financial Accounting Standards Board (FASB)
Changes Proposed to VIE Consolidation Rules for Private Companies
The FASB issued on Aug. 22, 2013, an exposure draft of a proposed Accounting Standards Update (ASU) that would exempt many private companies from having to apply variable interest entity (VIE) guidance to lessor companies under common control. The proposal, “Consolidation (Topic 810): Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements,” results from feedback received by the Private Company Council (PCC). The feedback indicates that many private-company stakeholders believe that consolidation of a lessor entity distorts the financial statements of the lessee entity and that any benefits of applying the complex rules in the VIE guidance to lessors under common control do not justify the related costs. After deliberations, the PCC recommended providing an elective accounting alternative for private companies. The FASB endorsed the PCC’s recommendation, leading to the issuance of this proposed ASU.
Under the proposal, an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of FASB Accounting Standards Codification (ASC) Topics 960 through 965 would have the option not to apply VIE guidance for assessing whether the entity should consolidate a lessor when the lessor and lessee are under common control and substantially all of the leasing arrangements between the two entities are related to the leasing activities of the lessor. Lessees electing to apply this option would be required to disclose additional information about the lessor. Disclosures would include the primary terms of the leasing arrangement, the amount and principal terms of existing debt agreements and significant liabilities of the lessor, and the important terms of any other explicit interest related to the lessor under common control. Entities electing the alternative accounting option would continue to apply other applicable ASC guidance, including Topic 840, “Leases,” and Topic 460, “Guarantees.”
The FASB also published a “FASB in Focus,” a short article describing the background and main provisions of the proposal.
Comments on the exposure draft are due Oct. 14, 2013.
2014 Proposed Taxonomy Released for Review
The proposed 2014 U.S. generally accepted accounting principles (GAAP) financial reporting taxonomy was released by the FASB for public review and comment on Aug. 30, 2013. The proposed taxonomy contains updates for accounting standards and other recommended improvements to the official taxonomy, which is used by public issuers registered with the U.S. Securities and Exchange Commission (SEC).
Comments on the proposed 2014 taxonomy are due Oct. 31, 2013.
From the Public Company Accounting Oversight Board (PCAOB)
Proposal Issued to Enhance the Auditor’s Reporting Model
On Aug. 13, 2013, the PCAOB issued two proposed new auditing standards intended to enhance the usefulness of the auditor’s communication to those relying on the auditor’s report.
The first proposed standard, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,” would retain the current pass-fail report model but would provide more information to report users about the audit and the auditor. The new standard would require the auditor to communicate “critical audit matters” in the auditor’s report. Critical audit matters are the matters the auditor addressed during the audit of the financial statements that involved the most difficult, subjective, or complex auditor judgments or posed the most difficulty to the auditor in obtaining sufficient appropriate audit evidence or forming an opinion on the financial statements.
The PCAOB believes that communicating critical audit matters will provide investors and other financial statement users with previously unknown information about the audit that could enable them to analyze more closely any related financial statement accounts and disclosures. The standard would also enhance certain standardized language in the auditor’s report and add new elements to the report related to the auditor’s independence, tenure, responsibility for, and evaluation of other information in annual reports containing the audited financial statements and the related auditor’s report.
The second proposed standard, “The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report,” is intended to improve the auditor’s procedures and enhance the auditor’s responsibilities with respect to other information. “Other information” in the proposal refers to information in a company’s annual report filed with the SEC under the Exchange Act of 1934, which also includes that company's audited financial statements and the related auditor’s report.
The required procedures under the proposed standard would focus the auditor’s attention on identifying (1) material inconsistencies between the other information and the company’s audited financial statements and (2) material misstatements of fact, based on relevant evidence obtained and conclusions reached during the audit.
Comments on the proposals are due Dec. 11, 2013.
From the Securities and Exchange Commission (SEC)
Credit Risk Retention Rule Proposed
The SEC, along with five other U.S. federal agencies, published on Aug. 28, 2013, a proposal that would revise a rule the agencies proposed in 2011 to implement the risk retention requirements in Dodd-Frank. The 2011 proposal generally requires the sponsor of asset-backed securities to retain not less than 5 percent of the credit risk of the assets collateralizing the asset-backed securities. The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision.
The agencies now propose that risk retention generally be based on fair value measurements without a premium capture provision. The new proposal provides several options to asset-backed securities sponsors for satisfying the risk retention requirements.
The new proposal would define qualified residential mortgages (QRMs) to have the same meaning as the term “qualified mortgages,” as defined by the CFPB. It also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria.
As in the original proposal, securitizations of commercial loans, commercial mortgages, or automobile loans of low credit risk would not be subject to risk retention.
Comments on the revised proposed rule are due Oct. 30, 2013.
Risk Alert Issued for Investment Advisers
On Aug. 27, 2013, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert on business continuity and disaster recovery planning for investment advisers. The risk alert summarizes the SEC staff’s observations after a review of the business continuity and disaster recovery plans of approximately 40 advisers located in the areas affected by Hurricane Sandy during October 2012. The alert is intended to encourage firms to review their business continuity plans in order to improve responses to and reduce recovery time after significant large-scale events.
EDGAR Filer Manual Updated
The SEC has published a final rule adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system filer manual. The revisions reflect updates in the EDGAR system, including those made to introduce a new submission form type SD (Specialized Disclosure) report for filers to use when submitting notices of disclosure relating to the use of conflict minerals.
For More Information
Sydney K. Garmong
Dennis M. Hild