Too Late
More on Axos and the Basel Endgame; a possibly significant FDIC enforcement action; a much less significant Connecticut enforcement action
This post features three items that, honestly, to have been timely this blog probably should have covered weeks ago. Nevertheless!
More on Axos and the Capital Rules
In a post just before Christmas, we discussed a September 2023 meeting between staff of the Federal Reserve Bank of San Francisco and Axos Financial.
According to a summary of the meeting released last month, representatives from Axos “expressed concerns” about the Basel Endgame proposal. In particular, though the revised capital rules would not apply to banks the size of Axos, the rules could in Axos’s view nonetheless be harmful for banks of its size because the proposed rules could reduce for larger banks that are subject to the proposal the amount of capital required to fund certain loans. From the meeting readout:
In particular, representatives expressed concern that the risk weighting of regulatory residential real estate exposures based on loan-to-value (LTV) in the Basel III endgame proposal would harm the smaller banks by providing a competitive advantage to large banks making low LTV loans.
The earlier blog post observed that it was not clear from the meeting readout what specifically Axos believes should be done to address its concern.
It turns out, though, that in addition to meeting with the FRBSF Axos has also submitted a comment letter to the OCC in which they provide more of an explanation. Axos argues that the agencies should:
1. Expand the applicability of the risk weights for real estate credit exposures to all banking organizations regardless of asset size; or
2. Expressly permit any banking organization, regardless of asset size, to “opt-in” for any specific component of the ANPR individually subject to the banking organization’s management discretion as ratified by the organization’s Board of Directors.
Axos does not state this directly in its letter, but if the agencies were to adopt either of these approaches, the agencies presumably then would also revise the proposed risk weights for residential real estate exposures to be consistent with the internationally agreed Basel framework,1 given that their choice to deviate upward in the proposal was driven (according to public statements at least) by competitive equity concerns.
FDIC Enforcement Action Against IT Service Provider
On the last working day of 2023, the FDIC released the public enforcement actions it took in November.
It was a pretty interesting set of enforcement actions so far as these things go, highlighted by an order directing Liberty Bank, Inc., a tiny Utah-based bank, to raise capital and then either sell itself or liquidate.2
But there is another enforcement action from this latest release that also may be worthy of note and that seems not to have yet drawn much attention.3 Like several of the enforcement actions discussed on this blog recently, this one is also tech focused, although in a different, maybe more traditional, way.
Bread Financial, formerly known as Alliance Data, is “a tech-forward financial services company that provides simple, personalized payment, lending and saving solutions.” The company has two insured depository institution subsidiaries, Comenity Bank and Comenity Capital Bank.4
Bread Financial also has a subsidiary called Comenity Servicing LLC. As described in a November 20, 2023 consent order, Comenity Servicing “provides information technology (IT) and other services” to certain (unnamed) depository institutions, and is an institution-affiliated party of those depository institutions.
The FDIC in the November 2023 consent order says that it has identified unsafe or unsound practices relating to, among other things, Comenity Servicing’s:
systems development,
project management,
business continuity management,
cloud operations, and
oversight of business arrangements between Comenity Servicing and other entities.
To address these deficiencies and other issues identified by the FDIC, including in an August 2022 exam report, Comenity Servicing’s board of directors will be required to take a more active role in their supervision and direction of the company’s management, and in their oversight and monitoring of the company’s activities.
One particular provision of note: Comenity Servicing’s board of directors must “ensure” that Comenity Servicing “does not initiate … a system conversion project that is rated ‘Deluxe’ under [Comenity Servicing’s] project complexity scorecard methodology” without having first obtained an attestation from the board of directors that Comenity Servicing is ready to undertake such a project.
Oops
Finally, only because my nightmares occasionally feature more or less this set of facts, here is a recent enforcement action brought by the Connecticut Department of Banking against MUFG Bank Ltd.
In late November 2022, the CT DOB approved MUFG’s application to establish a representative office in Danbury, Connecticut. The office opened a few days later and from that point on MUFG happily conducted business from there, doing whatever it is that representative offices do.
The problem, though, was that MUFG’s license for the representative office expired on June 30, 2023,5 and MUFG blew past that deadline without renewing.
At some point MUFG realized its mistake, and on October 3, 2023 notified the CT DOB “that it had inadvertently failed to renew its representative office license despite continuing to do business from that location after such license’s expiration.”
MUFG, which now has re-obtained the appropriate license, paid a $10,000 fine to resolve the matter.
Just to avoid giving the wrong impression: although this has been a focus of many comments submitted to the agencies and is interesting for its potential to scramble some of the political dynamics (both in the community bank vs. big bank sense and in the left vs. right sense), in the overall context of the Basel Endgame proposal the treatment of residential real estate exposures would not be a key driver of increases in required capital.
Other notable actions from the December 2023 FDIC release included a consent order against First Fed Bank (previously discussed on this blog) and a consent order with a subsidiary of Finward Bancorp (discussed by Paul Davis at The Bank Slate), although both of those had previously been disclosed in securities filings at least a month before the FDIC published them on its own site.
The only public reference I have seen to it is a brief one in this law firm memo.
Bread Financial is not a bank holding company because neither Comenity Bank (a Delaware credit card bank) nor Comenity Capital Bank (a Utah industrial bank) is a “bank” for purposes of the BHC Act. See the discussion in the Supervision and Regulation section on pages 9-10 of Bread Financial’s 10-K.
It may seem a little weird to give MUFG a license at the end of November 2022 and then have it expire just seven months later, but this is how it works for all representative offices under Connecticut law: “Each license issued pursuant to this section shall expire at the close of business on June thirtieth of each year, unless such license is renewed.”