CSI S QUARTERLY COMPLIANCE UPDATE

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1 CSI S QUARTERLY COMPLIANCE UPDATE March 26, 2015

2 WEBINAR INFORMATION Submit a question at any time Use Q&A window Webinar is being recorded Join us for a 2

3 TODAY S PRESENTER KEITH E. MONSON Chief Risk Officer Computer Services, Inc. (CSI) (800) x17705 keith.monson@csiweb.com csiweb.com Copyright Computer Services, Inc. 3

4 OVERVIEW Recent Updates/ Changes Regulatory Pipeline Regulatory Highlights Risk Management Practices 4

5 RECENT REGULATORY UPDATES/CHANGES 5

6 RECENT REGULATORY UPDATES/CHANGES Gramm-Leach-Bliley Act Privacy Regulation P Effective October 28, 2014 Regulation P requires that financial institutions provide an annual disclosure of their privacy policies to their customers Final rule creates an alternative delivery method for the annual disclosure, which financial institutions will be able to use under certain circumstances 6

7 RECENT REGULATORY UPDATES/CHANGES United States Department of Housing and Urban Development (HUD) Servicemembers Civil Relief Act Effective December 10, 2014 HUD s Servicemembers Civil Relief Act notice of mortgage foreclosure protections form was renewed HUD expires December 31,

8 RECENT REGULATORY UPDATES/CHANGES Office of Foreign Assets Control Crimea Sanctions Effective December 19, 2014 Investment in the Crimea region of Ukraine by a United States person is prohibited; Imports and Exports, directly or indirectly, of any goods, services or technology is prohibited; and Any approval, financing, facilitation or guarantee by a U.S. person of a transaction by a foreign person where the transaction by that foreign person would be prohibited is also prohibited. 8

9 RECENT REGULATORY UPDATES/CHANGES Dodd-Frank Act Stress Tests Effective January 1, 2015 Final rule revises the stress test cycle to begin on January 1 of the calendar year rather than October 1 for nonmember banks and state savings associations with total consolidated assets of more than $10 billion The guidance does not apply to community banks 9

10 RECENT REGULATORY UPDATES/CHANGES Basel III Regulatory Capital Rules Effective January 1, 2015 Strengthens the definition of regulatory capital, increases risk-based capital requirements and makes selected changes to the calculation of risk-weighted assets Standardized approach is effective for all insured depository institutions Banks not subject to advanced approaches under the new rules may elect to exclude AOCI from the capital calculations. (NOTE: this is a one-time election that must be made on Schedule RC-R of the March 31, 2015 Call Report) 10

11 RECENT REGULATORY UPDATES/CHANGES Internal Revenue Service IRA One-Rollover-Per-Year Rule Effective January 1, 2015 Current rules state that an individual is permitted to make only one nontaxable 60-day rollover between IRAs in any 1-year period Tax Court in Bobrow vs. Commissioner held that an individual could not make more than one nontaxable 60-day rollover within each 1-year period, even if the rollovers involved different IRAs The IRS will apply the Bobrow interpretation for distributions that occur on or after January 1,

12 RECENT REGULATORY UPDATES/CHANGES Exemption Thresholds Consumer Leasing Regulation M Truth in Lending Regulation Z Effective January 1, 2015 Based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Works (CPI-W) Exemption threshold is adjusted to $54,600 12

13 RECENT REGULATORY UPDATES/CHANGES Exemption Thresholds Home Mortgage Disclosure Act (HMDA) Regulation C Community Reinvestment Act (CRA) Regulation BB Effective January 1, 2015 Based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Works (CPI-W) Exemption threshold is adjusted to $44 million (HMDA) Banks with assets of less than $1.221 billion are small banks; and small banks with assets of at least $305 million and less than $1.221 billion as of December 31 are intermediate small banks 13

14 RECENT REGULATORY UPDATES/CHANGES Exemption Thresholds Fair Credit Reporting Act (FCRA) Effective January 1, 2015 Based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Works (CPI-U) Exemption threshold is adjusted to $12 where a consumer reporting agency is permitted to impose a reasonable charge on a consumer for making a disclosure to the consumer 14

15 RECENT REGULATORY UPDATES/CHANGES Regulatory Capital Rules Interim Final Rule Effective January 1, 2015 Amends the definition of qualifying master netting agreement under the regulatory capital rules and the liquidity coverage ratio rule Amends the definitions of collateral agreement, eligible margin loan and repo-style transaction under the regulatory capital rules Applies to OCC and Federal Reserve regulated banks * * proposed rule for FDIC regulated banks 15

16 RECENT REGULATORY UPDATES/CHANGES Regulatory Capital Rules Regulation Q Effective January 30, 2015 Exempts Savings and Loan Holding companies that have total consolidated assets of less than $500 million 16

17 RECENT REGULATORY UPDATES/CHANGES United States Department of Housing and Urban Development (HUD) Qualified Mortgage Rule Effective February 17, 2015 Defined qualified mortgage in a manner that aligns HUD s definition with that of the CFPB The alignment to CFPB s standards includes a crossreference to the limit on points and fees for a qualified mortgage 17

18 REGULATORY PIPELINE 18

19 REGULATORY PIPELINE Transactions secured by: Truth in Lending Act Appraisals for Higher-Priced Mortgage Loans Effective July 18, 2015 New manufactured home and land will be exempt from the requirements Existing (used) manufactured home and land will not be exempt from the requirements Manufactured home and not land will be exempt from the requirements if the creditor gives the consumer information about the home s value 19

20 REGULATORY PIPELINE Federal Reserve Collection of Checks and Other Items Regulation J Effective July 23, 2015 Adopting amendments to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available as soon as 30 minutes after receipt of the checks Consistent with the revised method for posting debits and credits to measure daylight overdrafts All items scheduled to settle on or after July 23, 2015 will post according to the new rule for these transactions, regardless of date of deposit 20

21 REGULATORY PIPELINE Dodd-Frank Act Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) Effective August 1, 2015 Integrates mortgage loan disclosures under Regulation Z and RESPA Creates new forms Loan Estimate form provides disclosures to consumers that will be helpful in understanding the key features, costs and risks of the mortgage for which they are applying Closing Disclosure form provides disclosures to consumers that will be helpful in understanding all of the costs of the transaction 21

22 REGULATORY PIPELINE Dodd-Frank Act Trading (Volcker Rule) Effective July 21, 2015 Prohibits any banking entity from engaging in proprietary trading or acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (covered fund) Conformance period is extended to July 21,

23 Interagency Community Reinvestment Act Q&As Amendments to FIRREA Concerning appraisals Further Amendments to 2013 Mortgage Rules Regulation Z and RESPA Flood Rules Biggert-Waters Act and the Affordability Act Proposed Rule Stage Supervision of Certain Nonbank Covered Persons Defining larger participants in certain consumer financial product and service markets Availability of Funds Regulation CC Home Mortgage Disclosure Act Regulation C FinCEN Renewal Without Change of CTR/SAR Requirements Requirements for Prepaid Cards Regulation E FinCEN Customer Due Diligence for Beneficial Owners 23

24 REGULATORY PIPELINE Pre-rule Stage Payday Loans and Deposit Advance Products Debt Collection Rule Overdraft Rules 24

25 REGULATORY PIPELINE Long-term Actions Truth in Lending Act Mortgage Amendments Business Lending Data Alternative Mortgage Transaction Parity Regulation Z Regulation B Regulation D 25

26 REGULATORY HIGHLIGHTS 26

27 REGULATORY HIGHLIGHTS CFPB Report Outlines Legal Violations Deceptive student loan debt collection practices Unfair and deceptive overdraft practices 27

28 REGULATORY HIGHLIGHTS Unfair and Deceptive Overdraft Practices Ledger balance vs. Available balance Working example: $100 balance - 80 ACH transaction = $20 available balance - 50 check = ($30 available balance) 28

29 REGULATORY HIGHLIGHTS CFPB Report Outlines Legal Violations Deceptive student loan debt collection practices Unfair and deceptive overdraft practices Mortgage origination violations Fair lending violations Mishandling of disputes by consumer reporting agencies 29

30 REGULATORY HIGHLIGHTS ABA President and CEO Frank Keating Trickle-Down Regulations One bank had examiner recommend stress test even though it was nowhere near the threshold Hiring more staff than bank needs reduces profits 30

31 REGULATORY HIGHLIGHTS OCC Outlines Supervisory Strategies for Community and Midsize Banks Strategic Planning and Execution Corporate Governance Stress Testing Operation Risk Cyber Threats Loan Underwriting Interest Rate Risk Compliance Fair Access to Lending 31

32 RISK MANAGEMENT PRACTICES 32

33 RISK DEFINED According to Webster s: The possibility of loss or injury, peril. Someone or something that creates or suggests a hazard. The degree of probability of a loss or the chance of loss or peril. To expose to a hazard or danger. Banking is a business of managing risks while maximizing profits. 33

34 COMPLIANCE DEFINED According to Webster s: The act or process of complying to a desire, demand or proposal or to coercion (the act, process or power of coercing to restrain or dominate). Conformity in fulfilling official requirements. A disposition to yield to others. The ability of an object to yield elastically when a force is applied flexibility. 34

35 GOVERNOR SUSAN SCHMIDT BIES AT THE NATIONAL CREDIT UNION ADMINISTRATION 2007 RISK MITIGATION SUMMIT JANUARY 11, 2007 all financial institutions should seek ways to strengthen risk management, but that the specific methods should depend on the size and level of complexity of the institution. 35

36 JOHN CONNEELY DEPUTY REGIONAL DIRECTOR AT FDIC NEW YORK REGION REGULATORY TELECONFERENCE FEBRUARY 9, 2012 To the extent that ERM is being characterized as a highly formalized, cutting edge, expensive new requirement that is being imposed by the regulators upon all banks it is false. There may be times when examiners and bankers differ in their assessment of the effectiveness banks have been good at managing risk in silos, but have not been effective in managing risks in the aggregate. 36

37 CAROLYN G. DUCHENE - DEPUTY COMPTROLLER OPERATIONAL RISK COMMUNITY BANK ENTERPRISE RISK MANAGEMENT SEMINAR OCTOBER 22, 2012 by rewarding risk awareness and information sharing, discouraging a siloed approach, and ensuring there is the right kind of information, in the right hands, at the right time to manage risks collectively and to achieve strategic objectives. 37

38 NCUA SUPERVISORY LETTER NOVEMBER 7, 2013 Credit Unions that incorporate ERM may resource the program internally, through paid consultants, or through a combination of outsourced and internal resources. provided core principles, controls, and due diligence are properly established. 38

39 RISK AND THE DODD-FRANK ACT Large banks ($10 billion in assets or greater) are required to have a board-level risk committee Banks ($50 billion or more in assets) must have a Chief Risk Officer Small banks not required to adopt But will adopting a risk management philosophy make small banks better risk managers? The best defense is a good offense 39

40 RISK AUDIENCE Board Senior Management Examiners 40

41 RISK CATEGORIES OCC Credit Risk Price Risk Interest Rate Risk Liquidity Risk Reputation Risk Operational Risk Compliance Risk Strategic Risk FED Credit Risk Market Risk Liquidity Risk Reputation Risk Operational Risk Legal Risk * reflected in risk categories NCUA Credit Risk Interest Rate Risk Liquidity Risk Reputation Risk Transaction Risk Compliance Risk Strategic Risk NOTE: FDIC reflects risk within the CAMELS ratings of its supervised institutions. 41

42 CHOOSING RISK INDICATORS Trustworthy, Available Data Perfect Risk Indicator Actionable Common Understanding Clear, Simple Calculation 42

43 KEY RISK INDICATORS PROBABALITY OF AN EVENT + ITS CONSEQUENCE >RISK APPETITE = NEGATIVE IMPACT 43

44 EXAMINE RISK INDICATORS List risk indicators Don t think that there are too many Risk indicators should be SMART Specific Measurable Achievable Result-oriented Time-bound Will they credibly illustrate performance? You can t manage what you can t monitor 44

45 KEY RISK INDICATORS 300 Construction and Land Development Loans to Risk Based Capital Bank Peer Group Risk Appetite

46 RISK APPETITE Acceptable level of variation relative to achievement of a specific objective Used interchangeably with risk threshold or risk limit 46

47 ASSESSING RISK RATINGS Inherent Risk Risk that an activity would pose if no controls or other mitigating factors were in place (the gross risk or risk before controls) Residual Risk The risk that remains after controls are taken into account (the net risk or risk after controls) 47

48 ASSESSING RISK TRENDS Direction of risk and probable change to risk over a predetermined amount of time: Increasing trend requires additional action Stable trend may require no action Decreasing trend may permit less action 48 48

49 BOARD REPORTING 49

50 BOARD REPORTING 50

51 PERFORMANCE WITH BOARD RISK TOLERANCES ACT PLAN CHECK DO 51

52 TRACKING OUTSTANDING ISSUES 52

53 WEAKNESSES Do not mistake low risk for no risk it does not eliminate risk! As organization grows more diverse and complex, risk indicators must likewise change Reports serve as a wake-up call for further discussion A chart cannot explain the reason behind elevated indicators Having risk indicators without using them shows a lack of management direction It is a waste of resource allocation Difficulty with manual inputs of data 53

54 Conclusion Risk management provides a significant opportunity to make your bank more efficient and better equips management to respond to concerns and issues more timely Without a coordinated risk strategy, organizations will continue to struggle with repeated policy iterations before procedures and controls are aligned efficiently 54

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56 SmartRisk NOW facebook.com/smartrisknow Copyright Computer Services, Inc. 56

57 SMARTRISK IQ - ENTERPRISE RISK MANAGEMENT (ERM) csiweb.com/erm 57

58 QUESTIONS? 58

59 Keith E. Monson, CRCM Chief Risk Officer Computer Services, Inc. (CSI) Phone: Web: (800) x17705 facebook.com/csisolutions 59