FINANCIAL SERVICES FLASH REPORT

Transcription

1 FINANCIAL SERVICES FLASH REPORT Interagency Guidance n Hme Equity Lines f Credit Nearing Their End-f-Draw Perids August 12, 2014 On July 1, 2014, the federal regulatry agencies fr financial institutins the Office f the Cmptrller f the Currency, the Bard f Gvernrs f the Federal Reserve System, the Federal Depsit Insurance Crpratin, and the Natinal Credit Unin Administratin (the agencies), alng with the Cnference f State Bank Supervisrs released supervisry guidance ( Guidance ) cncerning management by regulated entities f hme equity line f credit (HELOC) prtflis appraching their end-f-draw (EOD) perids. The Guidance utlines risk management principles and expectatins fr managing the risks assciated with these prtflis. Backgrund As hme values were rising rapidly in the mid-2000s, millins f hmewners btained HELOCs t leverage the grwing equity in their hmes. Ten years n and after the wrst husing crisis in the natin s histry, many f these lines are appraching their EOD perids beginning this year. An estimated $50 billin in lines are expected t reset ver the next three years. 1 Brrwers wh have been making interest-nly payments may be facing the prspect f significantly higher payments as lines begin t amrtize, r even a balln payment. Fr many f these brrwers, the value f their hmes may have declined and they may be attempting t renew r rewrite their lines under mre stringent credit cnditins than they experienced in the past. Implementatin f these EOD prgrams expses financial institutins t a variety f risks, including credit, peratinal and reputatinal risks. A key cncern f many institutins is retaining custmers thrughut the prcess. Given the variety f risks, institutins are being encuraged t design cmprehensive prgrams t manage the risks assciated with HELOC prtflis based n the risk management principles set frth in the Guidance. Summary The Guidance lays ut five verarching risk management principles n the basis f which supervisrs will be reviewing EOD prgrams: 1. Prudent underwriting fr renewals, extensins and rewrites 1 Helc Payment Jump t Take Bite Out f Cnsumer Spending, Nick Timiras, Wall Street Jurnal, June 1, 2014:

2 2. Cmpliance with pertinent existing guidance, including but nt limited t the Credit Risk Management Guidance fr Hme Equity Lending and the Interagency Guidelines fr Real Estate Lending Plicies 2 3. Use f well-structured and sustainable mdificatin terms 4. Apprpriate accunting, reprting and disclsure f trubled debt restructurings (TDRs) 5. Apprpriate segmentatin and analysis f EOD expsure in allwance fr lan and lease lsses (ALLL) estimatin prcesses The Guidance further suggests that institutins shuld cnsider the fllwing as they design and implement the risk management prgrams t manage their EOD prtflis: 1. Develping a clear picture f scheduled EOD perid expsures. 2. Ensuring a full understanding f EOD cntract prvisins. 3. Evaluating near-term risks. 4. Cntacting brrwers thrugh utreach prgrams. 5. Ensuring that refinancing, renewal, wrkut and mdificatin prgrams are cnsistent with regulatry guidance and expectatins, including cnsumer prtectin laws and regulatins. 6. Establishing clear internal guidelines, criteria and prcesses fr EOD actins and alternatives (renewals, extensins, and mdificatins). 7. Prviding practical infrmatin t higher-risk brrwers. 8. Establishing EOD reprting that tracks actins taken and subsequent perfrmance. 9. Dcumenting the link between ALLL methdlgies and EOD perfrmance. 10. Ensuring that cntrl systems prvide adequate scpe and cverage f the full EOD perid expsure. Challenges and Strategies fr Managing an EOD Prgram While institutins have always had t manage HELOCs reaching maturity, mre rbust prgrams are needed t manage the accelerating wave f maturities. The issuance f this Guidance elevates the regulatry scrutiny arund these prgrams. In this Flash Reprt, we share the challenges we have bserved and the strategies we have seen effective in managing these prgrams. 2 FRB: 12 CFR 208, subpart E and appendix C t subpart E (state member banks). OCC: 12 CFR 34, subpart D and appendix A t subpart D (natinal banks); and 12 CFR and appendix t (federal savings assciatins). FDIC: 12 CFR 365, subpart A and appendix A t subpart A (state nnmember banks); 12 CFR and appendix (state savings assciatins). The NCUA is nt a participant in this guidance. Prtiviti 2

3 Effective Crdinatin and Awareness Acrss Numerus Functins Management f an effective EOD prgram requires crdinated executin acrss a number f functins f the cmpany, including: Infrmatin systems Business analytics Marketing Underwriting Lss mitigatin Call center Lan peratins Cllectins Cmplaint management Accunting Lss frecasting Quality cntrl and quality assurance Risk management Cmpliance Audit Given the number f stakehlders invlved, timely identificatin f issues and cmmunicatin f strategy can be challenging. We have bserved as best practice that institutins shuld establish a prject management ffice (PMO) r a prcess champin wh has the ability t cmmunicate and serve as a central pint persn fr the EOD prgram acrss all functins. This individual and/r functin must have line-f-sight t all activities, allwing them t anticipate issues and cmmunicate with respnsible stakehlders t reslve issues timely. This individual and/r functin culd als be well-psitined as a central pint f cntact t cmmunicate with regulatrs n all aspects f the prgram. Sme institutins have als taken the apprach f establishing dedicated cmmittees cnsisting f executives frm varius stakehlder grups in rder t prvide cmprehensive versight and enable key decisin-making during the prcess. Similarly, institutins that have utsurced servicing f their HELOC prtfli must ensure their service prviders have adequate versight in place t perate an EOD prgram in cmpliance with all aspects f the Guidance. Anther imprtant element f effective crdinatin is training and awareness. All staff, frm call center t cllectins t cmplaints, must be trained with a cnsistent message t address custmers specific cncerns in navigating the EOD prcess. This includes staff f any utsurced vendr(s). Accuracy and Cmpleteness f Data The first step fr many institutins in managing their EOD prtfli is identificatin f the full ppulatin f lans impacted by the prgram. Once identified, careful segmentatin f the ppulatin is required t identify higher-risk segments. Accurate segmentatin is critical nt nly Prtiviti 3

4 fr the purpses f determining TDRs and adequate levels f reserves, but als fr designing an effective utreach strategy. Given that many institutins have grwn thrugh mergers and acquisitins, with lan data spread acrss disparate systems, identificatin and segmentatin may be challenging. There may either be gaps in the data r data may be mapped differently amng systems. Further cmplicating the matter, accunts in the prtfli may have been riginated under different brrwing agreements. Accrdingly, we recmmend institutins cnsider: Develping and dcumenting a methdlgy fr identifying the cmplete lan ppulatin. Steps in this prcess include: Cmpiling a cmplete inventry f prducts that may cntain EOD features. Reviewing cntractual requirements assciated with these prducts that may impact management f these accunts (e.g., pst-draw characteristics). Testing servicing systems with mck cases t understand impact n accunt prcessing (e.g., custmer statements) f different cntractual requirements. Invlving infrmatin technlgy partners early in the prcess t secure timely access t rbust data. Develping and dcumenting a methdlgy fr segmenting the ppulatin. As suggested by the Guidance, factrs t cnsider include: Originatin channel FICO scre Cmbined lan-t-value Utilizatin rates Payment histry Originatin vintage Cmpanies can leverage intelligence gained frm the segmentatin t develp a tailred strategy fr custmer utreach. Custmer Outreach Strategy Fr custmers wh have grwn accustmed t lw interest-nly payments, reaching their EOD perid may cme as a shck. Cnsequently, an effective custmer utreach strategy is imprtant t manage custmers effectively as they reach their end f term. Bth the timing and nature f utreach are critical. Timing Outreach as early as pssible prvides fr a smther transitin int the EOD perid and imprves the likelihd f custmer retentin. Custmers need time t understand what is happening and t prepare financially. The Guidance recmmends six t nine mnths r mre. Custmers pursuing refinancing ptins are ding s in an envirnment much different than the ne they experienced a decade ag. Prtiviti 4

5 Nature f Outreach As best practice: Institutins must leverage all manner f utreach t custmers t help them prepare fr the EOD perid: phased and repeated mailing, calling, articles n institutin s website, etc. Messaging must be clear with respect t timing, whm t cntact and ptential ptins available t the brrwer. This is particularly imprtant fr higher-risk custmers. Cmpliance can be a helpful partner in reviewing materials fr clarity and cnsistency with legal and regulatry requirements. Managing custmer feedback, such as cmplaints, plays an imprtant rle in the utreach strategy. Management can use custmer feedback t identify pprtunities fr imprving executin f the prgram. While implementing an effective utreach prgram is challenging, cmpanies may reap benefits thrugh imprved custmer retentin and the assciated revenue. Thinking mre bradly, intelligence gained thrugh an EOD prgram can als be leveraged t implement a data-enhanced utreach strategy. Prtiviti will sn be publishing a white paper utlining appraches t implementing such a strategy. Cmprehensive Reprting The Guidance emphasizes the imprtance f reprting in effectively managing an EOD prgram. Because f the breadth f activities invlved in implementing an EOD prgram, reprting must be designed t infrm senir management frm a variety f perspectives, including impact n risk prfile, peratins and financial results. Cmprehensive reprting is designed t answer a variety f questins, including: Credit and Operatinal Risk What is the risk prfile f the prtfli as it reaches its EOD perid? What is the risk prfile f lans being renewed/rewritten? Are significant exceptins t underwriting standards being made? What cntrls are in place t ensure the rganizatin s stated risk appetite and tlerances are cntinuing t be fllwed in the EOD prgram? Based n risk reprting, such as delinquency and lss frecasts, what peratinal cnsideratins, such as capacity planning, des the cmpany need t take int accunt in rder t prcess accunts effectively? Operatins What is the distributin f accunts reaching their EOD ver the next several years? Are utreach activities being executed timely t prvide custmers adequate time t react t their EOD? Are any system mdificatins necessary t handle increased vlumes f accunt prcessing? Are custmers being retained thrugh the prcess? Prtiviti 5

6 Financial Reprting Des the prtfli in run-ff include significant levels f TDRs and is the reserve fr the EOD prtfli adequate at this time? Are the results f prtfli segmentatin activities cnsistent with financial reprting? While the purpse f each type f reprting is different, a centralized apprach t develping reprting can facilitate efficiency, cnsistency and effectiveness. Mrever, a cmprehensive reprting apprach allws stakehlders acrss the varius functins t understand bth risks and successes f the EOD prgram. Next Steps Next steps fr executives implementing EOD prgrams: Identify key stakehlders invlved in the implementatin f the EOD prgram. In cncert with these key stakehlders, perfrm a gap assessment f current practices t the detailed requirements f the Guidance. Priritize reslutin f gaps identified with careful fcus n the fur areas discussed abve: Crdinatin and awareness acrss numerus functins Cmplete and accurate data Custmer utreach Cmprehensive reprting Hw We Help Cmpanies Succeed Our Risk and Cmpliance practice helps rganizatins by wrking with managers t assess, design and implement cmprehensive strategies fr strategic and risk management initiatives. We d this by assisting in design and executin f custmer utreach strategies, perfrming prtfli data analytics, establishing prject management functins and develping cmprehensive executive-level reprting. We can als help institutins identify gaps that may exist in their current strategies cmpared with the regulatry expectatins set frth in the Guidance. We wrk with frmer regulatrs and risk managers within Prtiviti in rder t benchmark an institutin s current practices relative t leading practices. Our team wrks cllabratively with ur clients t assess and develp effective, firm-wide strategies that are tailred t the size and cmplexity f the institutin. Prtiviti 6

7 Abut Prtiviti Prtiviti ( is a glbal cnsulting firm that helps cmpanies slve prblems in finance, technlgy, peratins, gvernance, risk, and internal audit, and has served mre than 40 percent f FORTUNE 1000 and FORTUNE Glbal 500 cmpanies. Prtiviti and its independently wned Member Firms serve clients thrugh a netwrk f mre than 70 lcatins in ver 20 cuntries. The firm als wrks with smaller, grwing cmpanies, including thse lking t g public, as well as with gvernment agencies. Prtiviti is a whlly wned subsidiary f Rbert Half (NYSE: RHI). Funded in 1948, Rbert Half is a member f the S&P 500 index. Fr additinal infrmatin abut the issues reviewed here r Prtiviti s services, please cntact: Cry Gundersn Managing Directr cry.gundersn@prtiviti.cm Renee Perez Assciate Directr renee.perez@prtiviti.cm Michael Brauneis Managing Directr michael.brauneis@prtiviti.cm Nirav Shah Assciate Directr nirav.shah@prtiviti.cm 2014 Prtiviti Inc. An Equal Opprtunity Emplyer M/F/D/V. Prtiviti is nt licensed r registered as a public accunting firm and des nt issue pinins n financial statements r ffer attestatin services.