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Nutter Bank Report, January 2014

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01.31.2014 | Legal Update

The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.

Headlines
1. Agencies Exempt Certain TruPS-Backed CDOs from the Volcker Rule
2. FFIEC Issues Risk Management Guidance on Social Media
3. CFPB Increases Certain Asset-Size Thresholds for HMDA and TILA Exemptions
4. Compliance Deadline Delayed for HUD Reverse Mortgage Requirements
5. Other Developments: Appraisal Requirements and Call Reports

1. Agencies Exempt Certain TruPS-Backed CDOs from the Volcker Rule

The federal banking agencies, the SEC and the CFTC have issued an interim final rule to permit banking organizations to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (“TruPS-backed CDOs”) from the investment prohibitions of the Volcker Rule, Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under the interim final rule issued on January 14, a banking organization may retain an investment in a TruPS-backed CDO if the CDO was established, and the investment instrument was issued, before May 19, 2010, the banking organization reasonably believes that the offering proceeds received by the TruPS-backed CDO were invested primarily in “Qualifying TruPS Collateral,” and the banking organization’s investment in the TruPS-backed CDO was acquired on or before December 10, 2013 (the date the agencies issued final rules implementing the Volcker Rule). The term Qualifying TruPS Collateral means any trust preferred security or subordinated debt instrument that was issued prior to May 19, 2010 by a depository institution holding company that had total consolidated assets of less than $15 billion or was issued prior to May 19, 2010 by a mutual holding company. The federal banking agencies also released a non-exclusive list of TruPS-backed CDO issuers that meet the requirements described above. The interim final rule becomes effective on April 1, when the rules implementing the Volcker Rule also become effective. Comments on the interim final rule are due within 30 days after publication in the Federal Register, which is expected shortly.

    Nutter Notes: The interim final rule on TruPS-backed CDOs also provides clarification that the exemption from the Volcker Rule extends to activities of the banking organization as a sponsor or trustee of securitizations that meet the exemption criteria described above, and that banking organizations may continue to act as market makers in those TruPS-backed CDOs. The final rules that implement the Volcker Rule also impose a ban on short-term proprietary trading of certain securities, derivatives, commodity futures and options on such financial instruments by banking organizations for their own accounts, and impose restrictions on banking organizations owning, sponsoring or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” Following the issuance of the final rules on December 10, 2013, a number of community banking organizations and trade associations expressed concern that the final rules would have the unintended consequence of requiring banking organizations to divest their interests in TruPS-backed CDOs because such CDOs often qualify as covered funds. Many banking organizations with investments in TruPS-backed CDOs had determined that generally accepted accounting principles required that such investments be reclassified from held-to-maturity to available-for-sale, resulting in charges based on the current fair market value of the investments. On December 27, 2013, the federal banking agencies announced that they would reevaluate whether it would be appropriate and consistent with the Dodd-Frank Act to exempt TruPS-backed CDOs from the prohibitions of the Volcker Rule.

2. FFIEC Issues Risk Management Guidance on Social Media

The Federal Financial Institutions Examination Council (“FFIEC”) has published final guidance on the applicability of federal consumer protection and compliance laws, regulations and policies to activities conducted via social media by banks and nonbank entities supervised by the CFPB. The guidance published on December 11, 2013, titled Social Media: Consumer Compliance Risk Management Guidance, does not impose any new requirements on financial institutions, but outlines potential consumer compliance and legal risks, and related risks like reputation and operational risks, associated with the use of social media. The guidance also explains supervisory expectations for managing those risks. The guidance defines social media as a form of interactive online communication in which users can generate and share content through text, images, audio and/or video. Messages sent by e-mail or text message, standing alone, are not social media for purposes of the guidance, though such communications also may be subject to some of the laws and regulations discussed in the guidance. According to the guidance, compliance and legal risk arise from the potential for violations of laws, rules, regulations, prescribed practices, internal policies and procedures or ethical standards when using social media. For example, social media maybe used to market products or originate new accounts. The federal banking agencies expect financial institutions to take steps to ensure that advertising, account origination and document retention are performed in compliance with applicable consumer protection and compliance laws and regulations, including Truth in Savings and Truth in Lending requirements, when social media is used for marketing or account origination.

    Nutter Notes: The guidance recommends that each financial institution develop and implement a risk management program that allows it to identify, measure, monitor, and control the risks related to social media. Those risks include risk of harm to consumers, compliance and legal risks, operational risks and reputation risks, according to the guidance. The guidance provides that the size and complexity of a risk management program should be commensurate with the breadth of the financial institution’s use of social media. However, the guidance recommends that institutions that have chosen not to use social media should still consider the potential for negative comments or complaints that may arise on social media platforms and evaluate in the risk management context what, if any, action to take to monitor for such comments or respond to them. The guidance recommends that components of a social media risk management program should include a governance structure with clear roles and responsibilities for directors and senior management, controls and ongoing assessment of risk in social media activities, written policies and procedures regarding the use and monitoring of social media and compliance with all applicable consumer protection laws and regulations, and a risk management process for selecting and managing third-party relationships in connection with social media. A social media risk management program should also include employee training on work-related use of social media and defining impermissible activities, an oversight process for monitoring information posted to proprietary social media sites administered by the financial institution or a third-party vendor, and audit and compliance functions to ensure ongoing compliance with internal policies and applicable laws and regulations.

3. CFPB Increases Certain Asset-Size Thresholds for HMDA and TILA Exemptions

The CFPB has issued final rules that adjust the asset-size exemption threshold for banks under Regulation C (Home Mortgage Disclosure), and the asset-size threshold for lenders to qualify for an exemption from the requirement to establish an escrow account for a higher-priced mortgage loan under Regulation Z (Truth in Lending). The adjustments announced on December 30, 2013 raise the Home Mortgage Disclosure Act (“HMDA”) asset-size exemption threshold to $43 million, meaning that banks with assets of $43 million or less as of December 31, 2013 are exempt from collecting HMDA data in 2014. An exemption from 2014 HMDA data collection requirements does not impact a bank’s responsibility to report the data it was required to collect in 2013. HMDA data are used to help determine whether financial institutions are serving the housing needs of their communities and to assist in identifying possible discriminatory lending patterns. HMDA and its implementing rules, the CFPB’s Regulation C, require most mortgage lenders to collect, report and disclose data about mortgage loan applications, originations and purchases. The data cover home purchase loans, home improvement loans and refinancing loans. Data reported include the type, purpose and amount of the loan, the race, ethnicity, sex and income of the loan applicant, the location of the property, and loan pricing information for some loans. The final rule adjusting the HMDA asset-size exemption threshold became effective on January 1, 2014.

    Nutter Notes: The CFPB increased the asset-size threshold for exemption from the requirement to establish an escrow account for a higher-priced mortgage loan under the Regulation Z to $2.028 billion, meaning that banks with assets of $2.028 billion or less as of December 31, 2013, and that also meet other requirements under Regulation Z, will be exempt from the requirement to establish escrow accounts for higher-priced mortgage loans in 2014. The Dodd-Frank Act amended the Truth in Lending Act (“TILA”) to impose a general requirement that an escrow account must be established by a lender to pay for property taxes and insurance premiums for certain first-lien higher-priced mortgage loan transactions. The Dodd-Frank Act also generally permits an exemption from the higher-priced mortgage loan escrow requirement for a lender that operates predominantly in rural or underserved areas, has total annual mortgage loan originations that do not exceed a limit set by the CFPB, retains its mortgage obligations in portfolio, and meets the asset-size threshold established by the CFPB. The adjustment to this asset-size threshold also increases the threshold that applies to determine whether small lenders that originate fewer than 500 mortgage loans annually and primarily serve rural or under-served areas are eligible to originate loans with balloon payment features that will still be considered Qualified Mortgages under Regulation Z. The final rule adjusting the TILA escrow asset-size exemption threshold became effective on January 1.

4. Compliance Deadline Delayed for HUD Reverse Mortgage Requirements

HUD announced that it is delaying the effective date of the financial assessment and funding requirements for the payment of property charges under its Home Equity Conversion Mortgage (“HECM”) program outlined in HUD Mortgagee Letters 2013-27 and 2013-28 (the “Mortgagee Letters”). The December 20, 2013 announcement said that HUD is considering changes to the guidance contained in the Mortgagee Letters in response to public comments, and that the new guidance will be effective no sooner than 90 days from the date it is issued. The changes announced in Mortgagee Letter 2013-27 to the HECM program requirements include a limit on the initial principal amount which can be disbursed in the first 12 months after closing and the establishment of a new mortgage insurance premium structure. Mortgagee Letter 2013-28 requires lenders to conduct a financial assessment on all prospective HECM borrowers to evaluate the borrowers’ willingness and ability to meet their financial obligations and the requirements of the mortgage. The Massachusetts Division of Banks issued an Industry Letter on HUD’s changes to the financial assessment and funding requirements under the HECM program on September 3, 2013. Lenders with an approved reverse mortgage program are permitted to originate HECM reverse mortgage loans in Massachusetts only if the lender submits documentation to the Division demonstrating compliance with state law requirements and HUD’s revised program requirements, according to the Industry Letter.

    Nutter Notes: The Division of Banks announced that it has extended the due date for submitting documentation demonstrating compliance with the financial assessment and funding requirements for the payment of property charges outlined in the Mortgagee Letters and the Division’s Industry Letter. Lenders, including banks, with approved reverse mortgage programs must submit their amended loan documentation and updated policies and procedures to the Division 30 days prior to the effective date to be designated by HUD when HUD issues the new guidance. Massachusetts law requires reverse mortgage loans to be made in accordance with programs that have been reviewed and approved by the Division under Chapter 167E, Sections 7 and 7A of the General Laws of Massachusetts. The law applies to Massachusetts banks and all other mortgagees making reverse mortgage loans under Chapter 183, Section 67 of the General Laws of Massachusetts. The Industry Letter reminds reverse mortgage lenders that they are required to update their programs by filing amendments to their reverse mortgage loan programs with the Division and to establish a deadline for the submission of amendments. Such reverse mortgage loan program amendments must be submitted to the Division on or before December 15. According to the Industry Letter, each lender with an approved reverse mortgage program must submit amended loan documentation along with any updated policies and procedures via compact disk or flash drive to demonstrate compliance with the Mortgagee Letters. Paper submissions will not be accepted.

5. Other Developments: Appraisal Requirements and Call Reports

  • Certain Higher-Priced Mortgage Loans Now Exempt from Appraisal Requirements

The federal banking agencies joined the CFPB and other federal financial regulators to issue a joint final rule on December 12, 2013 that creates exemptions from certain appraisal requirements for loans of $25,000 or less and certain streamlined refinancing that are classified as higher-priced mortgage loans under the Dodd-Frank Act. The joint final rule became effective on January 18, 2014.

    Nutter Notes: The agencies had previously issued a joint final rule implementing the new Dodd-Frank Act appraisal requirements, which became effective on January 18, 2014. The rule requires that, for higher-priced mortgage loans, the lender must obtain an appraisal meeting specified standards, provide the loan applicants with a notification regarding the use of the appraisal and give the applicants a copy of the written appraisal used.

  • FFIEC Approves Call Report Changes

The FFIEC has approved several changes to the Consolidated Reports of Condition and Income (the “Call Report”) that will be implemented as of March 31, 2014 and March 31, 2015. The FFIEC also has approved revisions to the FFIEC 101, Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework, that will take effect as of March 31, 2014.

    Nutter Notes: The Call Report changes that take effect in March 2014 include questions in Schedule RC-M about international remittance transfers, the reporting in Schedule RC-M of any trade names used to identify physical offices and addresses of public-facing internet web sites at which the reporting institution accepts or solicits deposits from the public, and questions in Schedule RC-E about whether the reporting institution offers deposit account products primarily intended for consumers.

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, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a “broad platform” of legal expertise in the practice “helps clients manage challenges and balance risks while delivering strategic solutions,” while the 2013 Chamber and Partners review reports that Nutter’s bank clients describe Nutter banking lawyers as “proactive” in their thinking, “creative” in structuring agreements, and “forward-thinking in terms of making us aware of regulation and how it may impact us,” which the clients went on to describe as “indicative of a true partner.” 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

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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