United States: Nutter Bank Report, December 2012

Headlines

1. FASB Proposes to Change Accounting Rules for Allowances for Credit Losses

2. CFPB and Justice Department Agree to Coordinate Fair Lending Enforcement

3. Federal Reserve Announces New Framework for Supervising Large Institutions

4. Nutter Advisory: Social Media Policies Pose NLRB Enforcement Risks

5. Other Developments: Dodd-Frank Implementation and Trial Disclosure Programs

1. FASB Proposes to Change Accounting Rules for Allowances for Credit Losses

The Financial Accounting Standards Board ("FASB") has issued a proposal to change impairment accounting so that the allowance for credit losses on loans and debt securities would be based on expected losses rather than on any of the multiple impairment models in current U.S. generally accepted accounting principles ("GAAP"). The December 20 proposal, issued in a FASB exposure draft titled Financial Instruments Credit Losses (Subtopic 825-15), is intended to require more timely recognition of credit losses and provide additional transparency about credit risk, according to FASB. Under the proposal, the existing "probable" threshold in U.S. GAAP for recognizing credit losses would be removed and the range of information to be considered in measuring the allowance for expected credit losses would be broadened. A bank's management would be required to estimate the cash flows that it does not expect to collect, using all available information, including historical experience and reasonable and supportable forecasts about the future. Under FASB's proposal, the balance sheet would reflect the current estimate of expected credit losses at the reporting date and the income statement would reflect the effects of credit deterioration or improvement that has taken place during the period. Public comments on the proposal are due by April 30, 2013.

Nutter Notes: It is possible that the FASB proposal could change not only the processes required to estimate the allowance for credit losses, but also may increase allowance balances for many banks. According to FASB, a bank would be able to choose not to recognize expected credit losses on financial assets measured at fair value under the proposal, with changes in fair value recognized through other comprehensive income, if both the fair value of the financial asset is greater than or equal to the amortized cost basis, and expected credit losses on the financial asset are insignificant. FASB said that it expects that different types of entities would leverage their current risk monitoring systems in implementing the proposed approach, with banks using regulatory risk categories, but that the inputs used to estimate the allowance for credit losses may need to change to implement the expected credit loss approach. Current U.S. GAAP includes five different incurred loss credit impairment models for instruments within the scope of the proposal, according to FASB. Those existing models generally delay recognition of credit loss until the loss is considered "probable." FASB said that this initial recognition threshold may have interfered with the timely recognition of credit losses and overstated assets during the recent global economic crisis.

2. CFPB and Justice Department Agree to Coordinate Fair Lending Enforcement

The Consumer Financial Protection Bureau ("CFPB") and the U.S. Department of Justice have entered into an agreement to strengthen coordination of the enforcement of fair lending laws, including the Equal Credit Opportunity Act ("ECOA"), and avoid duplication of their respective federal law enforcement efforts. The December 6 agreement outlines the general framework for sharing information and preserving confidentiality, joint investigations and coordination, and referrals and notifications between the agencies. CFPB and the Justice Department will be sharing information in matters that the CFPB refers to the Justice Department, in joint investigations under ECOA, and in order to coordinate fair lending enforcement. The agreement applies to all fair lending laws for which the CFPB has supervisory or enforcement authority, including ECOA, the Truth in Lending Act and the Home Mortgage Disclosure Act. The agreement provides for collaboration in investigations as well as coordination in joint investigations. The agencies will also meet regularly to discuss pending fair lending investigations and opportunities for coordination. The CFPB will refer matters to the Justice Department when the CFPB has reason to believe that a creditor has engaged in a pattern or practice of lending discrimination.

Nutter Notes: The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") grants the CFPB supervisory, enforcement and rulemaking authority under a number of federal fair lending and other consumer financial laws. The CFPB's supervision program assesses compliance by large depository institutions with federal consumer financial laws and regulations. CFPB-supervised entities include banks and thrifts with assets over $10 billion, and their affiliates and service providers. However, the Dodd-Frank Act grants the CFPB authority to identify possible discriminatory lending patterns and enforce federal fair lending laws against any creditor regardless of size. The Dodd-Frank Act required the formation of the Office of Fair Lending and Equal Opportunity within the CFPB, and charged the office with ensuring that the CFPB provides "oversight and enforcement of federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the CFPB." The Justice Department has authority to protect against discriminatory lending under ECOA, among other authorities. A referral to the Justice Department does not affect the CFPB's authority to pursue its own supervisory or enforcement actions. The CFPB and the Justice Department said that their efforts to coordinate enforcement will avoid unnecessarily duplicative actions.

3. Federal Reserve Announces New Framework for Supervising Large Institutions

The Federal Reserve has announced a new framework for the consolidated supervision of large financial institutions. The updated guidance published in Supervision and Regulation Letter No. SR 12-17 on December 17 is intended to provide greater clarity about supervisory objectives and expectations so that the public and banking organizations with more than $10 billion in assets that are subject to Federal Reserve regulation (i.e., bank holding companies and member banks) can better understand the Federal Reserve's focus in supervising large institutions. According to the guidance, the new supervisory program has two primary objectives: enhancing the resiliency of the institution to lower the probability of its failure or inability to serve as a financial intermediary, and reducing the impact on the financial system and the economy in the event of a large institution's failure or material weakness. The resiliency aspects of the new supervisory approach focus on capital and liquidity planning and positions, corporate governance, recovery planning and management of core business lines. In terms of reducing the impact of an institution's failure, the new approach will focus on management of critical operations, support for banking offices, resolution planning and additional macro-prudential supervisory approaches to address risks to financial stability. The Federal Reserve may periodically identify additional priorities beyond the core areas of focus to enhance institution-specific supervision and develop industry-wide perspectives, according to the guidance. The new supervisory framework will be implemented in a multi-stage approach, with additional supervisory and operational guidance developed to support implementation and assess progress.

Nutter Notes: The Federal Reserve's new supervisory approach for large institutions generally applies when a consolidated organization and its banking offices are in at least satisfactory condition and there are no material weaknesses or risks across the core areas of supervisory focus described above. The Federal Reserve said that it will apply additional supervisory expectations, and undertake related supervisory activities, to address identified concerns including areas subject to formal or informal enforcement action. According to the guidance, each large institution is expected to ensure that the consolidated organization (or the combined U.S. operations in the case of foreign banking organizations) and its core business lines have the financial and operational resilience to survive under a broad range of internal or external stresses. Core business lines are those that, in the institution's view, upon failure would result in a material loss of revenue, profit or franchise value. Each large institution also is expected to ensure the sustainability of its critical operations and banking offices under a broad range of internal or external stresses. Critical operations are those operations that, if they were to fail or be discontinued, could pose a threat to the financial stability of the United States.

4. Nutter Advisory: Social Media Policies Pose NLRB Enforcement Risks

Recent enforcement actions by the National Labor Relations Board ("NLRB") suggest that the risks of implementing social networking policies or social media policies in certain circumstances may outweigh the benefits for some employers, and in any case should be drafted and implemented with care. Since 2010, the General Counsel of the NLRB has filed complaints against both union and non-union employers on the basis of social networking policies. The essence of these complaints was that the employers violated the National Labor Relations Act ("NLRA") because the policies could be interpreted by employees as prohibiting them from discussing or complaining about their working conditions through social media communications with co-workers that the General Counsel believes are similar to 21st century "water-cooler" communications. Last year, for example, the General Counsel issued a complaint when an employer fired an employee for posting angry and off-color comments about her supervisor on her Facebook page, actions that violated the employer's social media policy, which prohibited employees from "making disparaging, discriminatory, or defamatory comments" about the employer, an employee's supervisor, co-worker or competitor. The General Counsel alleged that by making critical remarks about her supervisor to other employees, even through a Facebook page that could be accessed by non-employees, the employee was engaging in activities protected by the NLRA. In addition, the NLRB concluded that the social media policy itself violated the NLRA because its restrictions on employee blogging, internet posting, and communications purportedly interfered with and restrained employee rights under the NLRA.

Nutter Notes: The NLRA protects the rights of employees, whether unionized or not, to engage in protected "concerted activities" with fellow employees. As it relates to communication issues, the NLRA protects the right of employees to discuss their working conditions, wages and other terms of employment with one another. In the social media age, that right to communicate at times may conflict with employers' efforts to regulate social media exchanges by their employees. While it is possible to create a social media policy that will not be found to violate the NLRA, banks should assess their need for social media policies, and whether general bank policies on confidential information, computer usage and harassment might sufficiently address relevant concerns. Banks that believe social media policies are necessary and worth the risk should review and revise their policies to ensure that they cannot be interpreted to limit the right of employees to communicate about the terms and conditions of their employment. In undertaking these assessments, banking institutions should consider including, among other provisions, a requirement that employees obtain authorization before posting any information in the employer's name, and a prohibition on employees revealing the employer's proprietary, confidential or privileged information on any public site. For further information, please contact a member of Nutter's Labor, Employment and Benefits Practice Group or your Nutter attorney.

5. Other Developments: Dodd-Frank Implementation and Trial Disclosure Programs

  • GAO Report Criticizes Dodd-Frank Act Rulemaking Process

A December 18 report by the U.S. Government Accountability Office ("GAO") concluded that the federal banking agencies did not consistently follow key elements of Office of Management and Budget ("OMB") guidance on cost-benefit analysis when issuing regulations that implement the Dodd-Frank Act. While most financial regulators are not required to follow the OMB guidance, the GAO concluded that the agencies have missed opportunities to improve their cost-benefit analyses of Dodd-Frank Act rules by not more closely following the OMB guidance.

Nutter Notes: The GAO report on implementation of the Dodd-Frank Act also reviewed coordination by the banking agencies and other financial regulators on the Dodd-Frank Act rulemaking process and found that the differences between related rules remain even when coordination occurs.

  • CFPB Proposes Trial Consumer Disclosure Programs

The CFPB announced a proposed policy on December 13 called Project Catalyst that would allow financial institutions to develop and test new consumer disclosures on a case-by-case basis. As part of the project the CFPB would approve limited exemptions from federal disclosure laws to allow institutions to research and test informative, cost-effective disclosures to inform the CFPB's rulemaking process.

Nutter Notes: When deciding whether or not to grant a waiver from current disclosure requirements, the CFPB project would consider how effectively and efficiently the proposed trial will reveal potential improvements to consumer understanding about the costs, benefits, and risks of financial products and services, and mitigate risks to consumers.

www.nutter.com

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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Authors
Kenneth F. Ehrlich
 
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