Dodd-Frank Wall Street Reform Act say-on-pay vote

On January 25, 2011, rules were approved in a 3-2 vote by the Securities and Exchange Commission (SEC) to implement the say-on-pay provision in the Dodd-Frank Wall Street reform legislation. The vote is non-binding, and must occur at least once every three years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011. Public companies are also required to hold a vote at least once every six years to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. This frequency must be disclosed on SEC Form 8-K.

A temporary exemption was adopted for smaller reporting companies, those less than $75 million, with votes not required until annual meeting occurring on or after January 21, 2013. The exemption was adopted to assist the Commission in ensuring that its rules do not disproportionately burden small issuers.

Baker Tilly insights

We expect to see continued increases in executive compensation transparency. Although the votes referred to above are non-binding, the exposure of these matters into to the public domain inherently increases the accountability and responsibility of management teams and Board of Directors. The shareholders and other affected constituents of these companies will clearly be more sensitive to aggressive compensation structures, real or perceived. Institutions will be expected to provide a clear relationship between performance and compensation. Although the law applies only to public companies, privately held financial services companies with regulatory reporting responsibilities can be certain the effects of executive compensation transparency will be felt in their companies as well.

Consumer Financial Protection Bureau (CFPB)

On July 21, 2011, the Consumer Financial Protection Bureau will formally be able to send its examiners into the large financial players, such as JPMorgan Chase. While the CFPB currently does not have a director, it can still immediately write rules and issue orders about the consumer protection laws it is inheriting from the Federal Trade Commission and the Federal Reserve. Under the authority of the Treasury secretary, Timothy Geithner, the bureau can examine the books of approximately 110 banks that have assets in excess of $10 billion.

The bureau plans to watch for major violations of mortgage disclosure laws and other infractions that could cause consumers to unknowingly sign up for risky loans. The bureau will also determine whether credit card forms are misleading. Until a director is appointed, the CFPB not have the authority to oversee payday lenders, mortgage brokers, and other nonbank lenders. It will however have almost unlimited ability to oversee banks on consumer issues.

Baker Tilly insights

The existence of the CFPB is likely to change the dynamics of consumer banking for the foreseeable future. Bankers should expect higher levels of documentation requirements and agency intervention into the development and distribution of consumer banking products. Because the oversight of CFPB guidelines will be delegated to the primary banking regulators for all but the largest banks (< $10 billion in assets), the level of varying interpretation from bank to bank may be higher than anticipated in the early stages of implementing any new guidance on consumer banking activities. These differences may result in an unstable competitive environment and potential confusion to the intended beneficiary, the consumer.

Internal controls on mortgage lending and servicing activities

The long-lasting upheaval in the mortgage markets from the economic recession has resulted in significant costs and changes for those financial services companies performing mortgage lending and servicing activities. A constant stream of regulatory orders and initiatives, and unprecedented legal actions and settlements, demonstrate the depth and severity of the issues arising from shortsighted and insufficient internal controls, documentation, and oversight of mortgage lending and servicing activities. Settlements paid to government-sponsored entities, mortgage bond insurers, and investors in mortgage-backed securities are an indication of the challenges facing some of the largest financial services companies in demonstrating that appropriate process, documentation, and controls were applied as far back as 2004 and 2005 when originating and servicing loans.

The courts, regulatory agencies, and state attorney generals have effectively driven the mortgage industry to a much higher level of accountability. In response to this increased accountability, mortgage lenders have dramatically revised underwriting and documentation standards. These changes are reflected in measurably higher denial rates on mortgage applications and a significant increase in the time necessary to move a loan from application to closing. Along with continued downward pressure on housing prices arising from higher unemployment and lower consumer confidence, these changes have noticeably altered the mortgage finance industry in the United States.

Baker Tilly insights

The continuing movement for more intensive processes in the underwriting, approval, and servicing of mortgage loans will cause the cost of this business to rise. Along with the need to develop and maintain more robust and consistent procedures and internal control systems, these costs are likely to force many traditional participants in the mortgage market to reduce or eliminate this aspect of their business. Mortgage choices for consumers in the future are likely to be more limited, and the burden of proof for qualifying mortgage criteria will be increased. Many believe the stalled housing/mortgage market will continue for the next five to seven years. This timeframe will depend on the pace at which unemployment is measurably reduced and the excess inventory of foreclosed real estate is absorbed.