ICBA Mutual Bank Newsletter: Of Mutual Interest--January 2013 Edition

OCC Holds First Mutual Savings Association Advisory Committee Meeting

The Office of the Comptroller of the Currency Mutual Savings Associations Advisory Committee (MSAAC) recently held its first meeting. The MSAAC provides advice to the comptroller of the currency about mutual savings associations, evaluates the condition of mutual savings associations, and assesses regulatory changes that may ensure the health and viability of mutuals.

“We appreciate the OCC for renewing the charter for the MSAAC,” said Camden R. Fine, president and CEO of ICBA. “Mutual banks are an integral part of the community banking industry, and we appreciate Comptroller Curry and his staff for seeking input from mutual bankers through the MSAAC on issues and topics of interest to this important segment of the community banking industry.”

At this first meeting, attended by Comptroller of the Currency Thomas Curry and OCC senior staff, the MSAAC discussed the mutual savings association industry by providing updates on trends and the status of OCC-regulated mutuals and stock thrifts. The OCC staff said that capital levels are still lower than they were pre-crisis and asked the MSAAC whether they are at the level they want to be. Some members responded that they are stronger than before with lower capital levels because of growth, and others noted that certain banks are no longer taking deposits. The MSAAC also discussed the OCC’s policy for defining peer groups during examinations for mutuals and whether peer groups are limited to other mutuals or include all banks. The OCC clarified that examiners have the discretion in defining a peer group by looking at each institution and at the right comparative measures, such as a mutual bank’s business model or diverse portfolio.

The next panel discussed both voluntary supervisory conversions and merger conversions. The panelists reviewed the history and regulatory requirements of such conversions. During this discussion, a Federal Reserve Board staffer reviewed the Fed’s actions under Regulation LL and Regulation MM, stating that they are largely the same but with some changes, such as the dividend waiver rule. He encouraged banks to talk to FRB staff if they have a unique situation or are filing an application for the first time.

The OCC staff discussed the decline in the total number of mutuals in this country and how this relates to the number of conversions as well as the lack of new de-novo mutuals since 1983. As a result, the MSAAC discussed ways to preserve mutuality. MSAAC members raised suggestions, such as making the process of converting from credit unions to mutual banks easier and looking for alternatives to raising capital. The MSAAC agreed that this topic should be discussed in greater depth at a future meeting.

The OCC staff also provided a regulatory and legislative update. Staff said that the while the OCC may begin publishing proposed rules in the first quarter of 2013, they do not plan to propose any changes to mutuals before they gain a better understanding of the uniqueness and distinct characteristics of mutuals through continued and ongoing dialogue with the MSAAC. Staff also reviewed the Basel III regulatory capital proposal and included a summary of concerns expressed in comment letters they received.

As expected, the topic of the transition from Office of Thrift Supervision to OCC supervision was raised. OCC staff stressed that they view the integration as an ongoing process and continue to encourage feedback from the mutuals. They reviewed the feedback they have received to date, which includes:

Timeliness of the examination reports. OCC staff explained that this will be a major effort for them in the coming year and that bankers should see an improvement in this area.
The ability of bankers to challenge examiners’ decisions. The OCC assured the group that they take this seriously. In addition to having an ombudsman, they also have a lot of informal channels for open dialogue as part of their quality assurance.

Common issues that the OCC is seeing with mutuals and other thrifts include:

ALLL is more geared toward methodology rather than actual level being problematic.
The OCC has a high expectation for documenting capital planning.
The OCC expects to see appropriate liquidity contingency funding plans.
The OCC expects to see compliant flood and BSA programs. This is particularly important because BSA migrated into the management component of CAMELS.

The meeting concluded with OCC staff considering hosting a conference for federal mutual banks and asking each MSAAC member to provide any concerns and priorities they have with regard to mutual banks. Responses ranged from compliance concerns to interest rate risk as well as alternatives to raising capital.

Click here for information on OCC’s MSAAC.

New “Qualified Mortgage” Rule Accommodations Good News for Mutuals

ICBA-advocated concessions in the Consumer Financial Protection Bureau’s recently released final rule on consumers’ ability to repay mortgage loans will be particularly beneficial to mutual institutions. The CFPB’s final qualified mortgage (QM) rule, which takes effect Jan. 10, 2014, implements laws requiring mortgage lenders to determine a consumers’ ability to repay home loans before extending them credit.

QM Rule Rundown
Included in the rule is a definition of a “qualified mortgage” loan, which is entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. Qualified mortgages must satisfy certain product features (e.g., no negative amortization, no interest-only or “no doc” loans, points and fees limits) and meet certain underwriting criteria (e.g., debt-to-income ratio generally no higher than 43 percent, or meets Fannie/Freddie underwriting guidelines).

Among its key provisions, the rule provides a legal safe harbor for loans that satisfy the definition of a qualified mortgage and are not deemed to be “higher-priced” loans, which will help avoid unnecessary litigation. Without a legal safe harbor, borrowers could challenge in court a bank's compliance, even for loans that are deemed qualified. Qualified mortgages that are higher-priced will have a rebuttable presumption that the loan meets the ability-to-repay requirements. ICBA has strongly advocated that any final rule must include a safe harbor in order for many community bankers to continue to make mortgage loans.

Further, the rule treats balloon-payment loans as qualified mortgages if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. Creditors are eligible to make rural balloon-payment qualified mortgages if they originate at least 50 percent of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with their affiliates) originate no more than 500 first-lien mortgages per year.

Additionally, the bureau will designate a list of “rural” and “underserved” counties each year. Creditors must generally hold the loans on their portfolios for three years to maintain their qualified mortgage status. These loans need not meet the general 43 percent debt-to-income requirement.

The CFPB is also seeking comment on whether to modify the final rule to create a new category of qualified mortgages for other loans originated and held in portfolio by small creditors with less than $2 billion in assets. Under the proposal, both rural balloon-payment qualified mortgages and other mortgages made by these lenders with interest rates up to 3.5 percentage points above the average prime offered rate would qualify for the safe harbor.

Mutually Beneficial
The QM accommodations will be particularly beneficial for mutuals, which frequently portfolio their mortgage loans in addition to selling them off to Fannie and Freddie. Mutual institutions will benefit greatly from the temporary category of loans that are GSE eligible and are retained in portfolio.

ICBA has led the campaign for these accommodations, repeatedly encouraging the CFPB to structure the qualified mortgage standard as a legal safe harbor with clear, well-defined standards. The association also has worked with the CFPB to include community bank portfolio loans under the qualified mortgage definition.

Mutuals and other community banks have a vested interest in the performance of their loans, which are often for unique properties that don’t qualify for the secondary market. So a safe harbor approach for qualified mortgages is essential to prevent these institutions from ceasing or significantly curtailing mortgage lending.

“We are pleased that the bureau recognized these concerns in crafting the final rule and the proposed amendments,” ICBA Senior Executive Vice President and Government Relations Karen Thomas said at a field hearing on the rules. “We believe the safe harbor for qualified mortgages, which includes rural balloon payment mortgages, will enable the nation’s community banks to continue to serve their clients and communities while providing safe, sound and affordable mortgage credit.” ICBA will continue to urge the CFPB to expand the QM legal safe harbor to include more balloon mortgage loans as well as community bank loans held in portfolio, so that community banks can continue to provide mortgage loans to the best of their ability,

Read CFPB Summary.
Read ICBA News Release.