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Nutter Bank Report, March 2010

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03.31.2010 | Legal Update

Headlines
1.  Senate Banking Committee Approves Regulatory Overhaul Bill
2.  FDIC Citing Banks for ECOA Violations Based on Credit Report Fee Disparities
3.  Guidance on Funding and Liquidity Risk Management Issued by Banking Agencies
4.  DOL Changes Course on Status of Mortgage Loan Officers Under the FLSA
5.  Other Developments: Gift Cards and Customer Due Diligence

Full Reports

1.  Senate Banking Committee Approves Regulatory Overhaul Bill

The Senate Banking Committee on March 22 approved the Restoring American Financial Stability Act of 2010 by a 13-10 vote along party lines.

  • The bill would create a new systemic risk regulator to be called the Financial Stability Oversight Council.  The Oversight Council would have nine voting members, including the heads of the current federal banking agencies.  The Oversight Council would identify risks to the financial system and would, among other powers, have the authority to make recommendations to the Federal Reserve regarding prudential standards for “covered institutions.”
  • The bill would create a new Consumer Financial Protection Bureau (CFPB) with broad rule-writing authority under a wide range of consumer protection laws applicable to all banks, and broad powers to supervise and enforce consumer protection laws.  The CFPB would be housed within the Federal Reserve, but its Director would be appointed by the President and it would have separate funding.
  • The bill would prohibit new thrift charters, but grandfather existing ones.  After one year, the OTS would be abolished, and the current functions of the OTS would be divided up among the other agencies.
  • The bill would eliminate the Federal Reserve’s authority to regulate state member banks.
  • An Orderly Liquidation Fund with a target size of $50 billion would be established in the Treasury to cover the costs of resolving failed “covered financial companies,” defined to mean financial companies other than insured depository institutions that are systemically significant and with respect to which there is no viable private sector alternative available to resolve the company.
  • The national bank lending limit would be applicable to all insured institutions, including state chartered banks.
  • The Federal Reserve would have supervision of bank holding companies and savings and loan holding companies with $50 billion or more in assets, as well as all rulemaking authority over both bank holding companies and savings and loan holding companies of any size.
  • The OCC would have supervision and regulation of national banks and federal savings associations of any size, supervision of bank holding companies with less than $50 billion in assets (but only if the majority of assets held by depository institution subsidiaries are held by national banks and federal savings associations), supervision of savings and loan holding companies with less than $50 billion in assets (but only if the majority of assets held by depository institution subsidiaries are held by national banks and federal savings associations), and joint rulemaking authority with the FDIC for state and federal savings associations.
  • The FDIC would have supervision of bank holding companies with less than $50 billion in assets (but only if the majority of assets held by depository institution subsidiaries are held by state chartered institutions), rulemaking and supervisory authority with respect to state member banks, supervisory authority over savings and loan holding companies with less than $50 billion in total assets (but only if the majority of assets held by depository institution subsidiaries are held by state chartered institutions), supervisory authority over state savings associations, and joint rulemaking authority with the OCC for state and federal savings associations.
  • Depository institutions and their holding companies would not be able to engage in proprietary trading of securities, including bonds, equities, derivatives, options, commodities or other financial instruments.  The prohibition on proprietary trading would not apply to investments in U.S. Government securities, GNMA, FNMA and FHLMC instruments, and state and municipal bonds.

Nutter Notes:  The U.S. Senate has not yet acted on the bill.  Any bill approved by the full Senate will need to be reconciled with different legislation that has already been approved by the U.S. House of Representatives.

2.  FDIC Citing Banks for ECOA Violations Based on Credit Report Fee Disparities

In recent FDIC compliance examinations, examiners have criticized banks for allegedly treating joint applicants for residential mortgage loans differently based on their marital status in violation of the Equal Credit Opportunity Act (ECOA).  The alleged violations arise from a common set of circumstances, and many more banks may be vulnerable to similar claimed violations which may affect compliance and CRA ratings.  The alleged violations, raised during a number of compliance exams of banks in the region since the fourth quarter of 2009, result from apparent disparities among the fees for credit reports charged to married joint loan applicants as compared with credit report fees for unmarried joint applicants.  It is common practice for many banks to charge an applicant the fee incurred by the bank to obtain a credit report during the residential mortgage loan application process.  Although each loan applicant has a separate credit file, credit bureaus typically charge a lower fee or offer a discount to produce a joint credit report, which covers joint loan applicants on a single report, as compared with the total fees that would be charged for producing two separate credit reports.  Because the credit bureaus will provide a joint credit report on any two individuals regardless of marital status, the FDIC believes it is a violation of ECOA for a bank to order joint credit reports for married joint applicants but separate credit reports for unmarried joint applicants where it causes unmarried joint applicants to be charged higher credit report fees.

Nutter Notes:  Section 202.4(a) of the Federal Reserve’s Regulation B, which implements ECOA, prohibits a creditor from discriminating against an applicant on a prohibited basis including marital status.  According to the Official Staff Interpretations of Regulation B, disparate treatment of loan applicants on a prohibited basis “is unlawful if the creditor lacks a legitimate nondiscriminatory reason for its action, or if the asserted reason is found to be a pretext for discrimination.”  “Disparate treatment” occurs when a creditor treats applicants differently on a prohibited basis, such as marital status, according to the FDIC’s Policy Statement on Discrimination in Lending.  The Policy Statement also recognizes that the “fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation.”  The Policy Statement recognizes that a practice does not violate ECOA where the practice is justified by a business necessity and there is no less discriminatory alternative.  If the FDIC makes a preliminary finding of an ECOA violation during a compliance exam, it will generally give the bank notice and an opportunity to respond to the claims.  If the FDIC concludes that there is reason to believe that a bank engaged in a pattern or practice of discrimination that resulted in denial or discouragement of applications, ECOA generally requires the FDIC to refer the matter to the U.S. Attorney General, and it may be disclosed in the bank’s public CRA Exam Report.

3.  Guidance on Funding and Liquidity Risk Management Issued by Banking Agencies

The federal banking agencies, in conjunction with the Conference of State Bank Supervisors, have issued a policy statement on their expectations for sound funding and liquidity risk management practices.  The Interagency Policy Statement on Funding and Liquidity Risk Management released on March 17 summarizes past guidance from the agencies on principles of sound liquidity risk management and supplements certain of those principles with additional guidance derived from the “Principles for Sound Liquidity Risk Management and Supervision” issued in September 2008 by the Basel Committee on Banking Supervision.  The Interagency Policy Statement says that the agencies believe that liquidity risk management at many financial institutions is in need of improvement, as illustrated by recent market turmoil.  Deficiencies include insufficient holdings of liquid assets, funding risky or illiquid asset portfolios with potentially volatile short-term liabilities, and a lack of meaningful cash flow projections and liquidity contingency plans, according to the Interagency Policy Statement.  It reiterates the process that the agencies recommend institutions follow to appropriately identify, measure, monitor, and control their funding and liquidity risk.  In particular, the guidance emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk.

Nutter Notes:  Failure to maintain an adequate liquidity risk management process will be considered an unsafe and unsound practice, according to the Interagency Policy Statement.  The guidance indicates that the federal banking agencies expect each depository institution to manage liquidity risk using processes and systems that are commensurate with the institution’s complexity, risk profile, and scope of operations.  Because of the importance to the institution of identifying, measuring, monitoring, and controlling liquidity risk, the guidance recommends that a comprehensive process for liquidity risk management be fully integrated into each institution’s overall risk management processes.  The Interagency Policy Statement addresses critical elements of sound liquidity risk management, the relative responsibilities of the board of directors and senior managers at each institution, and examples of the measurements, limits, and guidelines that may be specified in an appropriate liquidity risk management policy.  The guidance recommends that liquidity risk management processes and plans be well documented and available for supervisory review.  It also reminds each institution that its board of directors is ultimately responsible for establishing and approving liquidity management strategies, policies and procedures, which should be reviewed at least annually.  

4.  DOL Changes Course on Status of Mortgage Loan Officers Under the FLSA

Lenders should be paying overtime to mortgage loan officers, who are no longer considered exempt employees, according to a recent legal interpretation by the U.S. Department of Labor that reverses earlier interpretations.  Administrator’s Interpretation No. 2010-1 issued on March 24 by the Department of Labor states that mortgage loan officers (also referred to as loan representatives, loan consultants and loan originators) do not qualify as administrative employees exempt from minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA).  The new interpretation states that mortgage loan officers cannot have exempt status because their primary responsibility is making sales (referred to as production work) rather than responsibilities associated with the management or general business operations of the employer.  The interpretation withdrew two earlier opinion letters: one from 2006 finding that a mortgage loan officer was exempt and one from 2001 finding that a mortgage loan officer’s work was directly related to the management policies or general business operations of the employer or the employer’s customers.

Nutter Notes:  Administrator Interpretations are not binding precedent in a court action but they are given deference as an opinion of the agency charged with enforcing the FLSA.  Depository institutions that do not currently track hours worked by their mortgage loan officers or pay overtime for hours worked in excess of forty per week should review these practices in light of the March 24 Administrator’s Interpretation.  Institutions should also note that a job title does not determine whether an employee is exempt from FLSA minimum wage and overtime requirements.  The employee’s actual job duties and compensation determine whether the employee is exempt or nonexempt.  Administrator’s Interpretation No. 2010-1 applies to employees who perform the typical job duties of a mortgage loan officer and spend the majority of their time working inside the institution’s offices, including employees who work in home offices from time to time.  The interpretation does not apply to mortgage loan officers who customarily and regularly work away from their employer’s place of business.  For further information, please contact your Nutter attorney or Christa von der Luft, the chair of Nutter’s Labor, Employment and Benefits practice.

5.  Other Developments: Gift Cards and Customer Due Diligence

  • Final Rule Restricts Dormancy, Inactivity, and Service Fees on Gift Cards

The Federal Reserve announced final rules on March 23 to restrict the fees and expiration dates that may apply to gift cards.  The final rules prohibit dormancy, inactivity, and service fees on gift cards unless: (1) the card has not been used for at least one year; (2) no more than one such fee is charged per month; and (3) clear and conspicuous disclosures about the fees are given.  Expiration dates must be at least five years after the date of issuance or after the date when funds were last loaded on the card, whichever is later.  The final rules are effective August 22, 2010.

Nutter Notes:  The final rules are issued under Regulation E to implement the gift card provisions in the Credit Card Accountability, Responsibility and Disclosure Act of 2009.  The Federal Reserve separately proposed a rule on March 3 to implement restrictions on credit card fees, penalties and rate increases under the Act.  Comments on the proposed rule are due by April 14, 2010.

  • Joint Guidance Issued on Obtaining Beneficial Ownership Information

The federal banking agencies, the Financial Crimes Enforcement Network, and the Securities and Exchange Commission – in consultation with staff of the Commodity Futures Trading Commission – on March 5 jointly issued guidance on obtaining beneficial ownership information as part of the customer due diligence process related to certain accounts and customer relationships.

Nutter Notes:  The guidance reiterates that each depository institution should develop customer due diligence procedures to identify customers who pose heightened money laundering or terrorist financing risks, and that such procedures should be enhanced in accordance with the institution’s assessment of those risks.

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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