United States

Regulatory panel update: What is the right strategy for your bank?


The Trump Administration has vowed to reduce regulatory burdens, but for financial institution examiners, it’s business as usual—and for now, that means scrutinizing high commercial real estate lending concentrations, evaluating risk-based examination frequency, and developing processes to respond to emerging issues such as the marijuana industry’s demand for financial services in certain states.

RSM and the Pacific Coast Bankers Bank hosted a wide-ranging discussion with regulators and bankers at an August event in San Francisco. With RSM principal Dan Shumovich as moderator, the panel featured:

  • Kathy Mo, director of the FDIC’s western region
  • Tom Cunningham, vice president and senior adviser for the Federal Reserve Bank of San Francisco
  • Edwin Chow, west region director for the Consumer Financial Protection Bureau

Following are key takeaways.

Regulatory agencies: vacancies at the top

The FDIC, Fed and CPFB all face proposals to restructure or restrict their power, while their Obama-appointed leaders have either left or are on the way out, leaving vacancies at the top in several key positions:

  • FDIC Chairman Martin J. Gruenberg is set to leave in November when his term expires, but no replacement has been named.
  • Acting Comptroller of the Currency (OCC) Keith A. Noreika, a temporary Trump appointee, is set to leave in November, and he has proposed to restrict the FDIC’s role in approving applications for federal deposit insurance.
  • Joseph Otting, the candidate to replace Noreika at the OCC, had a Senate confirmation hearing in July but faces more questions.
  • Randall Quarles, the candidate to replace Daniel Tarullo in the Federal Reserve’s top supervisory post, awaits Senate confirmation after an initial hearing in July. Quarles has called on the Fed to be more transparent and predictable.
  • Richard Cordray, the first director of the six-year-old Consumer Financial Protection Bureau, is scheduled to step down when his terms expires in 2018, but he reportedly is considering an early exit. Proposals are in the works to strip away most of the bureau’s enforcement power.

Areas of uncertainty for the financial industry

  • Despite expectations for quick, sledgehammer-style change, regulatory reform is moving slowly.
  • Bankers wonder how to lend to the health care industry when nobody knows what it’s going to look like.
  • High real estate valuations and concentrations in commercial real estate pose challenges to risk-management strategies.

Red flags in commercial real estate

  • Commercial real estate valuations exceed the pre-crisis levels of 2007-2008.
  • In San Francisco, real estate values are 33 percent above their pre-crisis peak.
  • Multifamily valuations are at all-time highs.
  • Capitalization rates are at unprecedent levels.
  • Interest rates are slowly rising.
  • High concentrations of construction loans are particularly vulnerable in the event of a downside scenario.
  • Concentrations in construction loans exceeding 100 percent are likely to attract attention from examiners.
  • Bankers should consider the impact of Amazon’s expansion on retailers, grocers and mall anchor tenants.

CECL: preparing for the next crisis

  • The Current Expect Credit Loss accounting model, commonly known as CECL, can help bankers to prepare for the next crisis.
  • CECL is set to gradually take effect over the next few years.
  • Smaller lenders have begun planning for implementation of CECL, while banks with more than $50 billion in assets are well into the implementation phase.
  • Middle-market bankers may not need not be early CECL adopters, since regulators understand the time and effort required to achieve compliance with these accounting rules.  This position may provide an implementation “grace period.”
  • The FDIC and Fed plan to release FAQs for smaller lenders on how to modify existing models and make data collection less onerous by using industry or Fed data.

CCAR exams may be less frequent

While comprehensive reform plans have languished in Washington, executive orders requiring cost-benefit analysis and a tailored supervisory approach have slowed progress on some related regulatory initiatives:

  • The Treasury Department, where Steve Mnuchin assumed leadership in February, issued a lengthy report in June calling for less frequent examinations and higher thresholds based upon asset size.
  • The asset-size threshold for Comprehensive Capital Analysis and Review (CCAR) could change from $1 billion to $2 billion, and the exam cycle would lengthen to 18 months from the current 12.
  • If those two changes were implemented, a large segment of mid-sized institutions would be examined every 18 months.
  • Some regulatory initiatives are moving ahead, including a reassessment of offsite surveillance and monitoring that could potentially change examination procedures for community banking organizations.

CPFB in crosshairs as scope grows, but it’s business as usual for now

The Consumer Financial Protection Bureau has become a key target for the new administration to reduce regulatory burdens.

In six years of existence, the bureau has taken on a long list of supervisory priorities that now includes large mortgage lenders, mortgage brokers, payday lenders, credit reporting agencies, debt collectors, student loan services, international remittance companies and auto finance companies.

Despite the proposals to reduce its enforcement powers, the bureau is preparing to conduct 2018 examinations. The bureau is also planning to add auto title lenders and installment lenders to its portfolio, and it issued new arbitration rules in July.

Current areas of scrutiny include incentive compensation programs and pay-by-phone options.

The CPFB takes enforcement action in 10 percent of the cases it investigates, and three-quarters of those are against nonbanks, mostly involving some sort of alleged unfair, deceptive or abusive acts or practices related to consumers.

The CFPB’s main focus is to evaluate whether a company has an effective system to self-identify, self-correct and self-police its operations.

Recommended reading from the Consumer Finance Protection Bureau to help make your business more consumer-friendly: 

1)    “Supervisory Highlights”: anonymized reports of all CFPB exam findings

2)    Press releases on enforcement actions: one-page plain-English descriptions of problems

3)    “Compliance Management System”: a section of the CFPB exam handbook

Marijuana banking: big business, conflicting laws

More than two dozen states have lifted or eased bans on marijuana, prompting strong demand for financial services. Because federal law still classifies marijuana as an illegal substance, financial regulators are caught in the middle.

Generally, banks refuse marijuana-related accounts to avoid the risk of prosecution under the federal Anti-Money Laundering Act, but the industry’s growth compels interest, with industry advocates seeking some form of compromise between federal and state laws.

Retail sales in 20 jurisdictions totaled $6.5 billion in 2016 and are projected to reach $30 billion in 2021, according to a May 8, 2017, article in Forbes.

The Cole Memo—a 2013 attempt by the Department of Justice to resolve the issue—is regarded as onerous and difficult to comply with.

John C. Williams, president and chief executive of the Federal Reserve Bank in San Francisco, is attempting to engage with Washington, but the current administration has not been open to brokering a solution.

Non-bank firms hoping to participate in the boom are pushing for access to the financial system through the Fed. An application by Denver-based Four Corners Credit Union was denied, but in June an appeals court ruled Four Corners could reapply after promising to serve the marijuana trade “only if legal.”


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