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Nutter Bank Report, August 2010

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08.31.2010 | Legal Update

Headlines
1. Mortgage Foreclosure Aid Bill Approved in Massachusetts
2. New Truth in Lending Rule Restricts Originator Compensation Practices
3. FDIC Proposes Guidance on Overdraft Payment Programs
4. Federal Banking Agencies Issue Guidance on Managing Reverse Mortgage Risks
5. Other Developments: SBLI and 18-65 Law

1.  Mortgage Foreclosure Aid Bill Approved in Massachusetts

Governor Patrick has signed into law Chapter 258 of the Acts of 2010, An Act Relative To Mortgage Foreclosures, which expands the rights of homeowners facing possible foreclosure. The law, which was approved on August 7, extends the 90-day right to cure a default under existing law protecting homeowners facing foreclosure to 150 days and also limits a lender’s ability to proceed directly to foreclosure after an earlier default that the borrower has cured. Under current law, a lender can proceed directly to foreclosure if, within any five-year period, a borrower defaults a second time after curing an earlier default within that period. The new law shortens that five-year period to three years, requiring a new 150-day right-to-cure notice following a default once a three-year period from the initial default expires. The right-to-cure provisions include an incentive for lenders to work with homeowners to modify loans in default by allowing the right-to-cure period to be reduced to 90 days if a lender’s representative confers with the borrower and makes a good-faith effort to negotiate a commercially reasonable alternative to foreclosure. The new law also places limitations on the ability of a mortgagee or subsequent owner to evict residential tenants in a foreclosed property. The new law requires “just cause” to evict such tenants, which includes failure to pay rent after receiving written notice, using the property for an illegal purpose, or certain lease violations. Finally, the new law establishes new disclosure and counseling requirements applicable to reverse mortgages. The right-to-cure provisions went into effect on August 7, 2010, and the other provisions will become effective at different times over the next several years.   

Nutter Notes:  The Massachusetts Division of Banks has published a series of answers to frequently asked questions about the changes to the timing and other provisions of the right-to-cure notice made by the new law. In the FAQs, the Division takes the position that the 150-day right-to-cure notice only applies to borrowers who are served a notice after August 7, 2010, and not to borrowers who have been served a 90-day right-to-cure notice before that date. The FAQs also note that 4 new disclosures must be contained in the right-to-cure notice, namely that the mortgagor may sell the property and use the proceeds to pay off the mortgage before the foreclosure sale, that the mortgagor may redeem the property by paying the total due before the foreclosure, that the mortgagor may be evicted after the foreclosure sale, and that the mortgagor may have certain additional rights depending on the terms of the residential mortgage. The FAQs state that the Division does not intend to issue emergency regulations relative to the changes to the right-to-cure notice made by the new law and that the filing requirements and procedures with the Division for the right-to-cure notice remain the same. The Division’s FAQs are available on its website and may be updated from time to time.

2.  New Truth in Lending Rule Restricts Originator Compensation Practices

The Federal Reserve has issued final rules amending Regulation Z, which implements the Truth in Lending Act, that place new restrictions on certain loan originator compensation practices and require notices to consumers when their mortgage loans have been sold or transferred. The final rules announced on August 16 prohibit a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. The new compensation rule applies to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. The final rule also prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation. The final compensation and anti-steering rules apply to closed-end home mortgage loans where the creditor receives a loan application on or after April 1, 2011. The Federal Reserve announced another final rule on August 16 to implement an amendment to the Truth in Lending Act that requires notice to consumers when their mortgage loans have been sold or transferred. An interim rule that provided compliance guidance on the new statutory requirements became effective in November 2009. Covered parties may continue to follow the November 2009 interim rules until the mandatory compliance date for the final rule, which is January 1, 2011.     

Nutter Notes:  The Federal Reserve separately released an interim rule on August 16 that revises the disclosure requirements for closed-end mortgage loans under Regulation Z. The interim rule requires that lenders' cost disclosures include a payment summary table stating the initial interest rate and corresponding monthly payment, the maximum interest rate and payment that can occur during the first five years of an adjustable-rate loan, a “worst case” example showing the maximum rate and payment possible over the life of an adjustable-rate loan, and the fact that a consumer might not be able to avoid increased payments by refinancing the loan. The interim rule also requires lenders to disclose certain features, such as balloon payments, and any option to make only minimum payments, that will cause loan amounts to increase. Lenders must comply with the interim rule in connection with applications they receive on or after January 30, 2011. The Federal Reserve is soliciting comments on the interim rule for 60 days after publication in the Federal Register, which is expected shortly. The Federal Reserve is also soliciting comments on proposed rules that would revise the escrow account requirements for higher-priced, first-lien "jumbo" mortgage loans, enhance consumer protections and disclosures for reverse mortgage transactions and require lenders to refund certain fees if a consumer decides to withdraw an application for any type of mortgage loan within 3 days after receiving applicable disclosures.

3.  FDIC Proposes Guidance on Overdraft Payment Programs

The FDIC has proposed guidance on how depository institutions should implement and maintain robust oversight of automated overdraft payment programs. The proposal released on August 11 encourages banks to find effective ways to monitor overdraft programs for the purpose of identifying excessive or chronic use by customers as a form of short-term, high-cost credit rather than as protection against occasional, inadvertent overdrafts. The proposal also provides an overview of how banks can avoid compliance and safety-and-soundness risks. According to the proposal, the FDIC expects a bank’s board of directors and management to ensure that the bank mitigates the risks associated with offering automated overdraft payment programs and complies with all consumer protection laws and regulations. In particular, that would mean providing clear and meaningful disclosures and other communications about overdraft payment programs, features and options, and demonstrating compliance with new overdraft fee disclosure requirements as well as new regulations that require notice and opt-in for customers to choose fee-based overdraft coverage of ATM withdrawals and one-time point-of-sale debit card transactions. Comments on the proposed guidance may be submitted until September 27, 2010.     

Nutter Notes:  Under new requirements in Regulation E that recently took effect, banks already must give customers an opportunity to opt in to programs that charge a fee to cover ATM and point-of-sale overdrafts. The proposed guidance states that the FDIC expects banks to promptly honor customers’ requests to decline coverage of overdrafts (opt out) in non-electronic transactions, give consumers the opportunity to opt in to the overdraft payment product that overall best meets their needs, and monitor accounts and take meaningful and effective action to limit excessive or chronic use of overdraft payment products. For example, the guidance recommends giving customers who overdraw their accounts on more than 6 occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. The proposal would also suggest that banks institute daily limits on overdraft fees, and not process transactions in a manner designed to maximize the cost to consumers. The proposed guidance resulted from the FDIC’s November 2008 Study of Bank Overdraft Programs that disclosed growing use of overdraft payment programs in the financial services industry, and a spike in consumer complaints to the FDIC related to overdraft protection programs, which almost doubled from 2008 to 2009.

4. Federal Banking Agencies Issue Guidance on Managing Reverse Mortgage Risks

The member agencies of the Federal Financial Institutions Examination Council (FFIEC) released final guidance entitled, “Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks” that addresses consumer protection concerns raised by reverse mortgages and the importance of mitigating the compliance and reputation risks associated with these products. The guidance published on August 17 also addresses the general features of reverse mortgage products, relevant legal requirements and consumer protection concerns raised by reverse mortgages. The guidance focuses on the need for depository institutions to provide clear and balanced information to consumers about the risks and benefits of reverse mortgage products while consumers are making decisions about these products, including informing consumers of available alternatives to reverse mortgages. The guidance also states that institutions should take steps to avoid any appearance of a conflict of interest and requires that consumers receive qualified independent counseling. The guidance addresses related policies, procedures, internal controls, and third-party risk management. The guidance will be effective on October 18, 2010.   

Nutter Notes:  According to the guidance, depository institutions under the supervision of the FFIEC agencies generally appear to provide two basic types of reverse mortgage products: the lenders’ own proprietary reverse mortgage products and reverse mortgages offered under the Home Equity Conversion Mortgage (HECM) program. A HECM loan is a reverse mortgage product insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). Both HECM loans and proprietary products are subject to the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Federal Trade Commission Act, and various other laws governing mortgage lending. HECM loans are also subject to an extensive regulatory regime established by HUD, including provisions for FHA insurance of HECM loans that protect both lenders and reverse mortgage borrowers. The guidance suggests that the use of reverse mortgages could expand significantly in coming years as more homeowners become eligible for reverse mortgage products as the elderly population of the United States increases. The guidance addresses consumer protection concerns that raise compliance and reputation risks, but recognizes that reverse mortgage products may also present other risks to lenders, such as credit, interest rate and liquidity risks, particularly for proprietary reverse mortgage products lacking the insurance offered under the federal HECM program.

5.  Other Developments: SBLI and 18-65 Law

  • SBLI Charter Statute Repealed

Chapter 176 of the Acts of 2010, signed by Governor Patrick on July 25, repeals Mass. Gen. Laws Chapter 178A, the statute that establishes the Savings Bank Life Insurance Company of Massachusetts (SBLI). Under the Act, SBLI has until December 31, 2010 to adopt restated articles of organization and by-laws in forms permissible for other domestic stock life insurance companies. The repeal will take effect on the date the restated articles of organization are filed with the Secretary of the Commonwealth.      

Nutter Notes:  The legislative change will release SBLI from a requirement in Mass. Gen. Laws Chapter 178A that SBLI price life insurance on a gender-neutral basis, which put SBLI at a competitive disadvantage in connection with certain policies. The Massachusetts Division of Insurance will require banks that currently are only licensed as agents of SBLI to obtain a bank insurance license if they wish to continue selling SBLI policies.

  • Amendments to the Massachusetts 18-65 Law Approved

Chapter 234 of the Acts of 2010, signed by Governor Patrick on August 4, amends the Massachusetts “18-65 Law” which imposes requirements in connection with certain deposit accounts maintained by individuals who are 18 or younger or 65 or older. Among other requirements, the amendments add additional disclosure requirements.     

Nutter Notes:  The amendments require banks to disclose annually to all depositors the provisions of the law applicable to a person 18 years of age or younger or 65 years of age or older, in addition to the current notice posting requirement, and removes the authority of the Commissioner of Banks to establish by rule a procedure for demonstrating eligibility for an 18-65 account.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288

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