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OCC overview

  • Employees - 3,104
  • Office locations - 91 (in addition the OCC maintains continuous on site presence at the the large banks it supervises)
  • Budget authority $775 million
  • Revenue derived from assessments - 97%
  • Consumer complaints opened - 58,810
  • Consumer complaints closed - 32, 533

National banking system at a glance

  • US commercial banks 5,396
    • National banks 1,565
      • Large banks 51
      • Midsize banks 71
      • Community 1,443
  • National banks as share of all US commercial banks - 29%
  • US commercial banking assets - $ 11,856 billion
  • National bank assets - $8,210 billion
  • National banks share of US commercial bank assets - 69%

2009 Annual Report

To say that these years have been eventful would be beyond understatement.

When I took office, the economy was growing, house prices were continuing to climb, and national banks were reporting strong growth and profits. By traditional measures, loan quality was excellent, noninterest income was robust, and capital was at historic highs. No bank failures occurred in 2005—or, for that matter, in 2006.

Yet, even then, it was clear that dark clouds were beginning to form on the financial system’s horizon. The OCC’s Survey of Credit Underwriting Practices 2005 showed continued easing of credit standards, reflecting pressure from competition and optimistic assumptions for loan volume, yield, and market share. Vulnerabilities were evident in the quality of leveraged loans, large corporate loans, and in rising concentrations of commercial real estate loans. Investors became increasingly wary of the risk such credits entailed, forcing many banks to hold unexpectedly large volumes of corporate loans and loan commitments on their balance sheets.

On the retail side of the business, residential mortgage and home equity lending standards slipped, as banks increased allowable debt-to-income and loan-to-value ratios and made more loans with reduced documentation requirements. Significantly, this easing of standards came at a time when prices in the previously robust housing market were leveling off and, in some markets, actually declining.

The OCC focused increased supervisory attention on areas that presented elevated safety and soundness concerns. Less than three months after taking office, I addressed OCC credit examiners and highlighted problems with underwriting standards, nontraditional mortgage products, and commercial real estate. Although we were working on interagency guidance at the time, I told examiners they should take steps immediately to evaluate the quality of underwriting in banks they supervise and to ensure that consumers were receiving adequate disclosures.

In September 2006, we issued guidance on nontraditional mortgages that required national banks to improve their risk management and disclosure policies on such products. In part because of the OCC’s emphasis on the safety and soundness and consumer compliance ramifications of subprime lending, national banks tended to steer clear of these risky products. The subprime loans that national banks did make represented only a small fraction of the total market and were generally of higher quality than those originated elsewhere.

Along with the other federal banking agencies, and over industry objections, we issued guidance that called on banks with heavy commercial real estate concentrations to adopt risk management and capital policies commensurate with the increased risk such concentrations posed. To monitor market trends and bank compliance with regulatory policy, we conducted intensive reviews of commercial real estate portfolios in national banks across the country. We delivered these cautionary messages repeatedly in speeches, in outreach meetings with bankers, and in our supervisory activities nationwide.

And because capital is a key element of any risk management regime and the bulwark of a safe and sound banking system, we worked within the Basel Committee on Banking Supervision to develop the Basel II risk-based capital requirements and with the other federal banking agencies to produce rules for its implementation in the United States.

Then, with suddenness that few foresaw, the subprime market collapsed.

As institutions struggled to assess the extent of their mortgage-related losses and those of their customers and trading partners, funding markets locked up, exacerbating the national recession that had begun in December 2007. Banks, including those that had never made a subprime loan, came under enormous stress, and the liquidity runs that followed were responsible for the collapse of several large institutions. The impact on the financial system was profound, and Wall Street’s troubles soon spread to Main Streets throughout America as house prices fell, foreclosures rose, and millions lost their jobs.

As this Annual Report recounts, the OCC played an important role in the government-wide effort to stabilize the banking system, restore the flow of credit, and assist victims of the financial crisis. We worked with the Federal Reserve and others to improve the liquidity positions of the banks we supervise.

We facilitated the merger and acquisition by national banks of insolvent thrift institutions and investment banks. We were deeply involved in the Troubled Asset Relief Program (TARP) capital assistance program, both in regard to the largest nine institutions that received TARP support and in the process for making regulatory recommendations on which smaller institutions should receive TARP capital.

We were very involved in the design and application of the “stress test” to assess how well our largest institutions could withstand a substantial credit shock and what additional capital needs these companies might have. The rigor of the tests and the transparency of the results fostered a healing process in which banks, as required by regulators, have been able to raise substantial amounts of capital to help repair their balance sheets.

The OCC’s massive effort to collect, analyze, standardize, and validate data on the performance of mortgage loans represents a contribution of which I am particularly proud. Our Mortgage Metrics Report, which we publish every quarter, now covers about 24 million first-lien mortgages totaling nearly $6 trillion in principal balances— 64 percent of all mortgages in the United States.

This data set has provided a deeper understanding of the mortgage market. It has been particularly useful in helping us understand what types of mortgage modifications were most likely to help distressed borrowers avoid foreclosure and remain in their homes. The OCC is using the Mortgage Metrics data to inform our supervisory policies and consumer protection initiatives.

We have also worked to enhance the quality of our supervision. The financial crisis identified several areas in need of improvement. The difficulty many banks faced in accessing liquid funds demonstrated the need for improved liquidity risk management and improved regulatory tools to analyze that risk. We need to better understand and better manage the risk posed by complex financial instruments, many of which were hidden in off-balance-sheet vehicles that clouded the extent of the institution’s exposure. And we need to revisit the issue of appropriate levels of concentration in such assets as commercial real estate loans.

As we adjust our supervisory approach and practices to address these challenges, we need to be mindful of actions that are pro-cyclical. Where possible, bank regulation should serve as an effective counterweight to the excesses—up or down—of the banking system.

Here, capital and loan loss reserves can play a critical role. At the start of this credit cycle, financial institutions did not have adequate loan loss reserves for the true credit risk in their portfolios, in part because the accounting system constrained their ability to increase and maintain a high level of reserves during a long period of benign credit conditions—even though the longer that period lasted, the more likely it was that the cycle would soon turn, increasing losses and the need for adequate reserves. I have long argued for greater flexibility in those rules so that banks can build stronger reserves when times are good and they can afford to do so, rather than wait until times are bad and the need to increase reserves can seriously strain their financial condition and the ability to extend credit.

As I write this message, Congress is considering the Administration’s regulatory restructuring proposals. I won’t try to predict the outcome of that debate—or even whether it will have come to an end by the time you read this report. But I would offer some thoughts on the future. Since its creation in 1863, the national banking system, consisting of the very largest and very smallest banks, has played a critical role in our nation’s economic growth. No matter where you travel in the United States, you need only to walk to the nearest ATM to obtain instantaneous access to your money and to be reminded that our financial system is truly a national one that offers U.S. businesses and consumers an array of products that would have been unimaginable even a generation ago. Choice for consumers and competition for their business have served us very well indeed.

Dodd-Frank modifies bank oversight

B. Effect on Federal Thrifts

While proponents of the thrift charter were able to preserve the charter and many of its benefits during the Conference Committee deliberations, the Reform Act nevertheless represents a fundamental regulatory change for thrift institutions, eliminating certain historical benefits of a thrift charter. Some of the provisions which will impact federal thrifts particularly are:

  • Abolition of the OTS; Expanded Authority of the OCC and Federal Reserve. Under Title III of the Reform Act, the OTS would effectively be merged into the OCC, with certain OTS responsibilities and authorities also being transferred to the FDIC and the Federal Reserve. Specifically:
    • The OCC will take over all functions and authority from the OTS relating to federal thrifts and the FDIC will take over all functions and authority from the OTS relating to state thrifts. The Federal Reserve will acquire supervisory and rulemaking authority over all savings and loan holding companies. The Federal Reserve will also become the supervisor of all subsidiaries of savings and loan holding companies other than depository institutions (the federal thrift subsidiaries of savings and loan holding companies will be supervised by the OCC). As a result of these changes, the OCC will become the primary federal regulator for all national banks and federal thrifts and the Federal Reserve will be the primary federal regulator for all depository institution holding companies. The FDIC will continue to oversee the deposit insurance fund and retain its resolution authority over depository institutions.
    • The OTS will be merged into the OCC and the foregoing responsibilities and authorities would be transferred on July 21, 2011 unless the Secretary of the Treasury opts to delay the transfer for up to an additional six months. Effective 90 days after such date of transfer, the OTS would be abolished.
    • All OTS personnel will be transferred to the OCC, including the examination staff. However, unlike H.R. 4173, the Reform Act does not create a Division of Thrift Supervision within the OCC.
    • The OCC has been working on a transfer and transition plan and will be grappling with both substantive and practical issues in connection with the transfer. Substantive issues include developing an examination approach for institutions with significant concentrations in 1-4 family residential loans on their balance sheet and understanding and evaluating the related particular interest rate risk issues.
Survival of the Home Owners' Loan Act.

The Home Owners' Loan Act, as amended ("HOLA"), which is the primary statute governing the establishment, operation and regulation of federal thrifts and savings and loan holding companies, will survive under the Reform Act with relatively few changes. The HOLA would have survived under the Senate Bill as well, but would have been abolished under H.R. 4173, which proposed that all existing savings and loan holding companies become bank holding companies and be regulated pursuant to the Bank Holding Company Act. Preservation of the Thrift Charter. The Reform Act preserves the power to grant new federal thrift charters. In doing so, the Reform Act avoids the certainty set forth in the Senate Bill, of the phase out and eventual extinction of the federal thrift charter. However, other aspects of the Reform Act discussed herein water down the historical benefits of the thrift charter and thus level the playing field between national banks and thrifts.

Penalties for Failure to Meet Qualified Thrift Lender Test.

The Reform Act establishes penalties for federal thrifts that fail to meet the requirements of the Qualified Thrift Lender Test. Specifically, federal thrifts that fails to meet the Qualified Thrift Lender Test will be prohibited from paying dividends, unless such dividends are: (i) permissible for national banks, (ii) necessary to meet the obligations of the company that controls the thrift and (iii) specifically approved by the OCC and the Federal Reserve. The Reform Act also provides that federal thrifts that fail to meet the Qualified Thrift Lender test will be deemed to have violated Section 5 of the HOLA and be subject to enforcement action under Section 5(d) thereunder. Restrictions on activities and branching applicable to federal thrifts that fail to meet the requirements of the Qualified Thrift Lender Test under current law will also continue to apply.

Future OCC Rulemaking.

The Reform Act requires the OCC to issue rules and conduct studies on a wide range of subjects. By July 21, 2011, the OCC must identify and publish in the Federal Register those regulations, orders and procedures followed by the OTS that the OCC will enforce [Section 316(c)]. By January 21, 2012, in conjunction with the other banking regulators, the OCC must jointly issue final rules to implement limitations on purchases of assets from insiders [Section 621] and also prepare a report on the activities that a banking entity may engage in under Federal and State law, including interpretation and guidance [Section 620(a)-(b)] By April 21, 2011, the OCC, along with the other relevant Federal regulators, must also issue regulations/guidelines for enhanced compensation reporting by each covered institution [Section 956(a)(1)], and rules prohibiting any types of incentive-based payment arrangements that encourage inappropriate risks by covered financial institutions [Section 956(b)].

The OCC, jointly with the other financial regulators, is directed to establish minimum requirements to be applied by a State in the registration of appraisal management companies [Section 1473 (f)] and, quarterly, to publish and submit a list of the Comptroller's preemption determinations [Section 1044 (a)]. By January 21, 2011, the OCC must also establish an Office of Minority and Women Inclusion responsible for all matters related to diversity [Section 342(a)(1)(A)] and thereafter submit an annual report as to the efforts of the OCC and the Office pursuant to Section 342.

Effect on Savings and Loan Holding Companies.

Like the Senate Bill but unlike H.R. 4173, the Reform Act does not eliminate the savings and loan holding company or expressly provide that savings and loan holding companies will be regulated as bank holding companies. Savings and loan holding companies will continue to be subject to the HOLA, but now administered by the Federal Reserve. However, by vesting rulemaking authority and supervision over savings and loan holding companies with the Federal Reserve, savings and loan holding companies may become subject to activities restrictions and other new regulatory requirements to which they may not have previously been subject and the Federal Reserve could use such rulemaking authority to effectively cause savings and loan holding companies to be regulated like bank holding companies. In addition, the Reform Act explicitly requires that regulatory capital requirements be imposed on savings and loan holding companies for the first time.

Interstate Branching and Acquisitions.

In a significant change from the Senate Bill, the Reform Act does not make any change to the ability of a federal thrift to branch interstate. However, a federal thrift that converts to a bank will be permitted to continue to operate branches in existence, or in the process of being formed, prior to the enactment, and may establish additional branches in the states in which it operated prior to becoming a bank (provided such establishment would be permissible for a State bank under such State's laws). The Reform Act also expands the interstate branching opportunities afforded to national banks and insured state banks by eliminating state reciprocity requirements, the primary state obstacle to interstate de novo branching. National banks and insured state banks will now be permitted to establish a de novo branch in a state if a bank chartered by such state would have been permitted to establish the branch. These changes remove one of the significant advantages that the federal thrift charter historically had over the national bank charter. The Reform Act also bolsters the requirements for interstate acquisitions, now requiring that the acquiring financial institution be well-managed and well-capitalized, as opposed to the current requirement that such institution be adequately capitalized and adequately managed. The change in the interstate acquisition requirements indicates that the regulators are expecting a cushion over the well-capitalized levels.

Preemption Issues.

The Reform Act specifically states that the HOLA "does not occupy the field in any area of State law" (emphasis added) and adds a new section to the HOLA which requires the OTS (and the OCC as its successor agency) and any court to make federal preemption determinations in accordance with the laws and legal standards applicable to national banks regarding the preemption of state law. Therefore, the Reform Act ends the broad field preemption authority that federal savings associations have enjoyed in the past and expressly applies the preemption standards applicable to national banks to federal thrifts. Because the Reform Act also significantly rolls back the broad preemptive authority that the OCC has enjoyed by requiring that (1) a state consumer financial law "prevent or significantly interfere with" the exercise of a national bank's powers before it can be preempted and (2) any preemption determination be made on a case-by-case basis, rather than by a blanket rule, the Reform Act effectively "levels the playing field" between federal savings associations and national banks on the preemption issue so that both are now subject to the Barnett standard. Accordingly, this provision is a "game changer" for thrifts.

Transaction with Affiliates.

The Reform Act broadens the scope of covered transactions to effectively limit the assets an insured depository institution can place at risk through the operations of an affiliate. The definition of a "covered transaction" in Regulation W is expanded to subject derivative transactions and any credit exposure by a bank to its limits and requirements. Any purchase of assets from, or sale of assets to, an executive officer, director, or principal shareholder by a bank must be on market terms and, if the transaction represents more than 10% of the capital stock and surplus of the bank, must be previously approved by a majority of the uninterested board of directors. The Federal Reserve would retain rulemaking authority over transactions with affiliates, including Regulation W, which has been expanded to include derivative transactions and any credit exposure by a bank to its limits and requirements for covered transactions.

Mutual Holding Company Dividend Waiver.

The Reform Act grandfathers mutual holding companies that had waived receipt of dividends prior to December 1, 2009 from having waived dividends, past or future, be counted against the exchange ratio in any second-step conversion transaction. In addition, the Reform Act preserves the right of mutual holding companies that had waived receipt of dividends prior to December 1, 2009 to waive dividends going forward, so long as any such dividend waiver would not be detrimental to the safety and soundness of a savings association and the board of directors of the mutual holding company expressly determines that such dividend waiver is consistent with the board's fiduciary duty to the mutual members of the mutual holding company. Although the intent of this language was and is to permit mutual holding companies that had waived dividends in the past in reliance on existing OTS regulations to continue to do so, it remains to be seen how the Federal Reserve will administer dividend waiver requests and interpret the "safety and soundness" requirement in light of the historical animosity of the Federal Reserve towards dividend waivers. Mutual holding companies that had not waived dividends prior to December 1, 2009 will not be permitted to waive dividends going forward.

Mortgage Loan Origination and Risk Retention.

The Reform Act amends the Truth in Lending Act to impose new standards for residential mortgage loan originations on all lenders, including all banks and thrifts. Of significance are new standards with respect to the originator's determination of a borrower's ability to repay the loan in accordance with its terms, including income verification by the originator in connection with processing a borrower's loan application. Under the Reform Act, the originator is obligated to make a reasonable and good faith determination based on verified and documented information that the borrower has a reasonable ability to repay the loan in accordance with its terms. Among other requirements in connection with this determination, income verification should include the expected income or assets, determined by reviewing the consumer's Internal Revenue Service Form WÐ2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer's income or assets. Following the lead of many state legislatures which have implemented ability-to-repay requirements on non-depository lenders at the state-level, this new provision creates a federal standard requiring that residential mortgage loans are fully-underwritten to confirm the appropriateness of the loan product for the borrower. Qualified mortgages (as defined and discussed below) will be presumed to comply with the repayment ability requirement.

The Reform Act also requires the federal banking agencies to jointly promulgate regulations by April 21, 2011 which, among other things, require any securitizer to retain an economic interest (generally 5%) in the credit risk for any residential mortgage loan that the securitizer, through the issuance of a mortgage-backed security, transfers to a third party. The securitizer's required percentage of risk retention will be reduced by the percentage of risk retention obligations required of the mortgage originator. The regulations are required to specify the permissible forms of risk retention and the minimum period of time for which the risk must be retained. The Reform Act instructs the federal regulators to develop separate rules governing the securitization of different asset classes, including for residential mortgages, commercial mortgages, commercial loans, auto loans and any other classes that such regulators deem appropriate.

The Reform Act requires that the federal banking regulators jointly issue regulations to exempt "qualified residential mortgages" from the risk retention requirements of the Reform Act. The definition of "qualified residential mortgage" cannot be broader than the definition of "qualified mortgage," which is defined as any residential mortgage loan which has the following characteristics:

  • the regular periodic payments do not result in an increase of the principal balance or permit the consumer to defer repayment of principal, except as otherwise provided in regulations issued by the Federal Reserve;
  • the terms of the loan do not result in a balloon payment, except as otherwise provided in regulations issued by the Federal Reserve;
  • the income and financial resources of the borrowers are verified and documented;
  • in the case of a fixed rate loan, the underwriting process is based on a payment schedule that fully amortizes the loan and takes into account all applicable taxes, insurance and assessments and, in the case of an adjustable rate loan, the underwriting is based on the maximum rate permitted under the loan during the first 5 years and a payment schedule that fully amortizes the loan and takes into account all applicable taxes, insurance and assessments;
  • the loan complies with any guidelines established by the Federal Reserve relating to debt-to-income ratios or alternative measures of ability to pay;
  • loans for which the total points and fees (as defined under HOEPA) minus bona fide discount points which do not exceed 3% of the total loan amount; and
  • the term of the loan does not exceed 30 years, except as provided by the Federal Reserve.

In addition, in defining the term "qualified residential mortgage," federal banking regulators must take into account the "underwriting and product features that historical loan data indicate result in a lower risk of default," including residual income after monthly obligations, the ratio of housing payments to monthly income, mitigating the potential for "payment shock," mortgage insurance or other credit enhancements obtained at origination, and prohibiting or restricting balloon payments, negative amortization, prepayment penalties and interest-only payments.

It is possible that the new origination and risk retention requirements will cause originators and securitizers to focus their efforts on "plain vanilla" mortgage products. In any event, Federal thrifts should carefully evaluate these new requirements and implementing regulations as they are issued and consider undergoing a wholesale re-evaluation of their loan origination and underwriting policies, procedures and guidelines.. A comprehensive summary of the new mortgage origination and risk retention requirements will be addressed in a separate alert.

C. Next Steps

The many new financial regulations that are expected to be proposed, amended and finally adopted to implement the Reform Act will require careful review and analysis as they are likely to have a significant impact on the way that federal thrifts must conduct their business. The process for the consideration of these regulations will provide important opportunities for financial institutions, including federal thrifts that may be adversely impacted, to influence the substance of these regulations by offering comments and suggesting more attractive alternatives. Finally, as financial regulations are considered and ultimately adopted to implement the Reform Act, federal thrifts should review whether changes are required in their operations or in their regulatory compliance programs to ensure that they can comply with their new obligations under the new bank regulatory regime. Although the impact of the consolidation of the OTS into the OCC has yet to play out, all federal thrifts should begin to consider the following actions:

  • Evaluate the existing OCC examination guidelines in advance of their next examination Ð although the formal transfer is at least a year in the future, the OCC and the OTS will be working with each other and are likely to conform examination approaches at some point
  • Compare the benefits of the new thrift charter with a national bank and applicable state bank charter -- charter conversion remains available to interested thrifts
  • Evaluate consolidated holding company capital and capital alternatives available in the market place, especially for the thrift holding companies with significant double leverage through the issuance of holding company debt where the debt proceeds were contributed as equity to the thrift subsidiary
  • Review their regulatory compliance programs to ensure that they can comply with their new obligations under the new bank regulatory regime.

Current rulemaking

Dugan says underwriting standards could reform securitization

Comptroller of the Currency John C. Dugan said today that a robust securitization market is vital to funding the needs of consumers and businesses, and urged policy makers to focus reform efforts on improving underwriting standards rather than “skin-in-the game” risk retention proposals.

“Asset securitization played a significant role in the crisis, and nobody should think that we can just wait for the market to stabilize and then go back to business as before,” he said in a speech to the American Securitization Forum. “But I hope we also recognize just how important securitization is to our economy. Done correctly, securitization helps consumers and businesses by increasing the availability of credit on terms that might otherwise be unavailable.”

The OCC supports accounting and regulatory changes that more appropriately align securitizations with risk, he said, although they make it more difficult for these transactions to qualify as true sales and move off the balance sheet.

However, these standards, including FAS 166 and 167, raise fundamental and difficult questions about how securitizations can be structured in the future to result in true sales, true risk-shifting, true off-balance sheet treatment, and appropriately lower regulatory capital charges, he said.

“Will it be possible to move securitized assets off the balance sheet in a way that works economically for both securitizers and investors? And if not – if securitizations are much more often treated as “financings” rather than true sales – will it be possible to have a truly robust securitization market?”

Proposals for risk retention requirements, which are intended to assure sound underwriting by requiring securitizers to hold some part of the securitized loans on its own balance sheet, create a potential problem, he said.

“Where a securitizer retains a material risk of loss on loans transferred in a securitization, the new accounting and regulatory capital rules may require that all loans in the securitization vehicle be kept on the bank’s balance sheet – not just the amount of risk required to be retained,” he said. “This could significantly increase the regulatory capital charge for such securitizations.”

Mr. Dugan said that there is a great deal of uncertainty about how the new accounting standards will work in practice. “We don’t yet know whether the mere fact of retention by itself will constitute such control, but it appears to be a distinct possibility,” he said. “At a minimum, it appears that it will be a significant factor weighing against off-balance sheet treatment in a given transaction.”

The Comptroller said a better and more direct way to assure sound underwriting for all mortgages, regardless of whether they are sold or held, would be to set minimum standards by regulation and stipulate that if the standards were met, there would be no need for skin-in-the-game risk retention requirements.

“We could do this,” he said. “Bank and thrift regulators could establish minimum underwriting standards for all mortgages originated, purchased, or sold by banks, thrifts, and – very importantly – by all of their affiliates. The Federal Housing Finance Agency could ensure similar treatment for all mortgages purchased or accepted as collateral by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. And the Federal Housing Administration, which already establishes minimum underwriting standards for U.S. government-guaranteed mortgages, could coordinate those actions with the other regulators.”

Mr. Dugan said Congress could ensure these steps were taken by directing the agencies to coordinate in setting minimum underwriting standards. “And it could more directly reach the part of the mortgage market not currently subject to direct federal regulation – unregulated mortgage originators and brokers – by subjecting them to the standards set by federal regulators, bolstered by an effective enforcement mechanism,” he added. “And it could also consider going even further by making it unlawful for any person to sell or transfer a mortgage without representing that such standards are satisfied.”

The Comptroller said it is critical that comparable standards be established for all loan originators and that there be truly comparable levels of effective regulatory implementation. He said regulators should stick to the basic, core standards on which there is the clearest consensus, including:

Effective verification of income and financial information;

  • Meaningful down payments;
  • Reasonable debt-to-income ratios; and
  • For monthly payments that increase over time, qualifying borrowers based on the higher, later rate, rather than the lower, initial rate.

“I do not mean to suggest that minimum underwriting standards are a panacea, or even that they would work as well for other asset classes as I think they would for mortgages,” Mr. Dugan added. “Other measures, including more robust disclosures, credit rating reform, and changes in compensation practices all merit consideration by policymakers, and that process is underway. I do think, however, for the reasons I’ve discussed, that minimum underwriting standards should be strongly considered as an alternative to rigid skin-in-the-game requirements.”

Related Links:

Regulatory Capital – FAS 166/167 and ABCP Conduits

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the agencies) are seeking comment on a joint notice of proposed rulemaking (NPR) related to the Financial Accounting Standards Board’s (FASB) adoption of Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166) and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167).


The agencies use generally accepted accounting principles (GAAP) as the initial basis for determining whether an exposure is treated as on- or off-balance sheet for regulatory capital purposes.

On June 12, 2009, the FASB issued FAS 166 and FAS 167 (new accounting standards) which are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. These accounting standards will make substantive changes to how banks account for many items, including securitized assets, that are currently excluded from these organizations’ balance sheets.

The agencies are issuing the proposed NPR to better align regulatory capital requirements with the actual risk of certain exposures. The agencies believe that the broader accounting consolidation requirements in the new accounting standards will result in a regulatory capital treatment that more appropriately reflects the risks to which banks are exposed. Accordingly, the agencies are proposing to continue to follow GAAP by using the new accounting standards in determining on-balance sheet exposures for regulatory capital.

Under the NPR, the agencies also propose to modify their general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets. The agencies also propose to provide a reservation of authority in their general risk-based and advanced risk-based capital adequacy frameworks to permit the agencies to require banking organizations to treat entities that are not consolidated under GAAP as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the structure.

Banks affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The agencies’ proposal seeks comment and supporting data on whether a phase-in of the increase in regulatory capital requirements is needed. The agencies also seek comment and supporting data on a number of other matters, including policy alternatives to address any unique challenges the new accounting standards present with regard to the allowance for loan and lease losses provisioning process including, for example, the current constraint on the amount of provisions that are eligible for inclusion in tier 2 capital.

The NPR was published in the Federal Register on September 15, 2009. Comments on the NPR will be accepted through close of business, October 15, 2009.


You may direct questions or comments to Paul Podgorski, Risk Expert, Capital Policy Division, at (202) 874-4755; or Carl Kaminski, Senior Attorney, Legislative and Regulatory Activities Division, at (202) 874-5090.

Family (1-4) residential mortgages modifications

Interim Final Rule link


The Office of the Comptroller of the Currency (OCC) published in the Federal Register on June 30, 2009, an interim final rule concerning the risk-based capital treatment for one-to-four family residential mortgages modified under the U.S. Treasury Department’s Making Home Affordable Program (program). This bulletin transmits and briefly summarizes that interim final rule.


The program provides a framework for mortgage lenders and servicers to restructure certain one- to-four family mortgages to make them more affordable. Under the OCC’s general risk-based capital rules, mortgages modified pursuant to the program would be considered “restructured” and thus no longer eligible for a 50 percent risk weight; such mortgages would receive a 100 percent risk weight. The interim final rule changes the risk-based capital rules so that mortgage loans modified under the program will retain the risk weight assigned prior to the modification, so long as the loan continues to meet other prudential criteria. In other words, the risk weight applied to a given mortgage loan prior to modification under the program – whether 50 percent or 100 percent – would be retained for that mortgage loan subsequent to the modification. However, a modified loan that was receiving a 100 percent risk weight because it was 90 days or more past due or on nonaccrual would be eligible to return to the 50 percent risk weight category after demonstration of a sustained period of repayment performance consistent with current OCC practice.

Further Information

You may direct questions or comments to Margot Schwadron, Senior Risk Expert, Capital Policy Division, at (202) 874-6022 or Carl Kaminski, Senior Attorney, Legislative and Regulatory Activities Division, at (202) 874-5090.

Structure and activities of the OCC

The Office of the Comptroller of the Currency (or OCC) is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States.

Headquartered in Washington, D.C., it has four district offices located in New York City, Chicago, Dallas and Denver. It has an additional 48 field offices throughout the United States, and a London office to supervise the international activities of national banks. It is an independent bureau of the United States Department of the Treasury and is headed by the Comptroller of the Currency. The OCC fulfills a number of main objectives:

  • ensures the safety and soundness of the national banking system;
  • fosters competition by allowing banks to offer new products and services;
  • improves the efficiency and effectiveness of OCC supervision especially to reduce the regulatory burden;
  • ensure fair and equal access to financial services to all Americans;
  • enforces anti-money laundering and anti-terrorism finance laws that apply to national banks and federally-licensed branches and agencies of international banks; and
  • is the agency responsible for investigating and prosecuting acts of misconduct committed by institution-affiliated parties of national banks, including officers, directors, employees, agents and independent contractors (including appraisers, attorneys and accountants).

The OCC participates in interagency activities in order to maintain the sanctity of the national banking system. By monitoring capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, consumer compliance, and community reinvestment, the OCC is able to determine whether or not the bank is operating safely and soundly, and meeting all regulatory requirements. The OCC was created by Abraham Lincoln to fund the American Civil War but was later transformed into a regulatory agency to instill confidence in the National Banking system and protect consumers from misleading business practices.

The OCC regulates and supervises about 1,600 national banks and 50 federal branches of foreign banks in the U.S., accounting for nearly two-thirds of the total assets of all U.S. commercial banks (as of June 30, 2009).

Other regulatory agencies like the OCC include: the Federal Deposit Insurance Corporation (of which the Comptroller serves as a director), the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration. The OCC routinely interacts and cooperates with other government agencies, including the Financial Crimes Enforcement Network, the Office of Foreign Asset Control, the Federal Bureau of Investigation, the Department of Justice, and the Department of Homeland Security.

The Comptroller also serves as a director of the Neighborhood Reinvestment Corporation, and the Federal Deposit Insurance Corporation.

In 2003, the OCC proposed regulation to preempt virtually all state banking and financial services laws for national banks and their diverse range of non-bank, corporate operating subsidiaries.[1] Despite opposition from the National Conference of State Legislatures[2], the OCC's regulations went into effect. In Watters v. Wachovia in 2007 the Supreme Court validated the preemption of state regulations by the OCC.[3] The U.S. Supreme Court in deciding Cuomo v. Clearing House Association overturned this decision of the OCC, stating that federal banking regulations did not pre-empt the ability of states to enforce their own fair-lending laws.

In July 2007, the OCC launched HelpWithMyBank.gov to assist customers of national banks and provide answers to national banking questions.[1]

Walsh to become Acting Comptroller Of The Currency

When Comptroller of the Currency John C. Dugan leaves office on August 14, John G. Walsh will become Acting Comptroller of the Currency. Walsh currently serves as Chief of Staff and Public Affairs for the OCC, a position he has held since October 17, 2005.

Walsh joined the OCC from the Group of 30, a consultative group that focuses on international economic and monetary affairs. He joined the Group in 1992, and became Executive Director in 1995. Walsh served on the Senate Banking Committee from 1986 to 1992 and as an International Economist for the U.S. Department of the Treasury from 1984 to 1986. Walsh also served with the Office of Management and Budget as an International Program Analyst, with the Mutual Broadcasting System, and in the U.S. Peace Corps in Ghana.

John Dugan, Comptroller of the Currency

John C. Dugan was sworn in as the 29th Comptroller of the Currency in August 2005. The Comptroller of the Currency is the administrator of national banks and chief officer of the Office of the Comptroller of the Currency (OCC). The OCC supervises nearly 1,600 federally chartered commercial banks and about 50 federal branches and agencies of foreign banks in the United States, comprising nearly two-thirds of the assets of the commercial banking system. The Comptroller also is a director of the Federal Deposit Insurance Corporation and NeighborWorks® America.

In September 2007, Comptroller Dugan was named Chairman of the Joint Forum, which operates under the aegis of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. The Joint Forum includes senior financial sector regulators from the United States, Canada, Europe, Japan, and Australia, and deals with issues common to the banking, securities, and insurance industries, including supervision of conglomerates.

Before his appointment as Comptroller, Mr. Dugan was a partner at the law firm of Covington & Burling, where he chaired the firm’s Financial Institutions Group and specialized in banking and financial institution regulation. He served at the U.S. Department of the Treasury from 1989 to 1993 and was appointed Assistant Secretary for Domestic Finance in 1992.

While at Treasury, Mr. Dugan had extensive responsibility for policy initiatives involving banks and financial institutions, including the savings and loan cleanup, Glass-Steagall and banking reform, and regulation of government-sponsored enterprises.

In 1991, he oversaw a comprehensive study of the banking industry that formed the basis for the financial modernization legislation proposed by the administration of the first President Bush.

From 1985 to 1989, Mr. Dugan was Counsel and Minority General Counsel for the U.S. Senate Committee on Banking, Housing, and Urban Affairs. There he advised the committee as it considered the Competitive Equality Banking Act of 1987, the Proxmire Financial Modernization Act of 1988; and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

A 1977 University of Michigan graduate with an A.B. in English literature, Mr. Dugan earned his J.D. from Harvard Law School in 1981. Born in Washington, D.C., in 1955, Mr. Dugan lives in Chevy Chase, Maryland, with his wife, Beth, and his two children, Claire and Jack. John C. Dugan For more about the OCC visit http://www.occ.gov

Comptrollers of the Currency

  • Hugh McCulloch - (1863-1865)
  • Freeman Clarke - (1865-1866)
  • Hiland R. Hulburd - (1867-1872)
  • John Jay Knox - (1872-1884)
  • Henry W. Cannon - (1884-1886)
  • William L. Trenholm - (1886-1889)
  • Edward S. Lacey - (1889-1892)
  • A. Barton Hepburn - (1892–1893)
  • James H. Eckels - (1893-1897)
  • Charles G. Dawes - (1898–1901)
  • William Barret Ridgely - (1901-1908)
  • Lawrence O. Murray - (1908-1913)
  • John Skelton Williams - (1914-1921)
  • D. R. Crissinger - (1921–1923)
  • Henry M. Dawes - (1923–1924)
  • Joseph W. McIntosh - (1924–1928)
  • John W. Pole - (1928–1932)
  • J. F. T. O'Connor - (1933–1938)
  • Preston Delano - (1938-1953)
  • Ray M. Gidney - (1953–1961)
  • James J. Saxon - (1961–1966)
  • William B. Camp - (1966–1973)
  • James E. Smith - (1973–1976)
  • John G. Heimann - (1977–1981)
  • C. T. Conover - (1981-1985)
  • Robert L. Clarke - (1985–1992)
  • Eugene Ludwig - (1993–1998)
  • John D. Hawke, Jr. - (1998–2004)
  • John C. Dugan - (2005 – present)


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